Economics HL Cram

Marginal Utility

The extra satisfaction gained from consuming one additional unit of a good

How does the Law of Diminishing Marginal Utility explain the shape of the demand curve?

As a consumer consumes more of a good, the extra satisfaction (MU) from each additional unit decreases. Since consumers won't pay more for a unit than the satisfaction it gives them, they will only buy more units if the price falls. This explains the downward slope of the demand curve

Substitution Effect

If the price of a good falls, it becomes cheaper relative to other goods. Consumers will then substitute the now-cheaper good for more expensive alternatives, increasing quantity demanded

Income Effect?

When a good's price falls, a consumer's real income (or purchasing power) increases. This allows them to afford more of the good within the same budget.

Marginal Product?

The additional output produced by adding one more unit of a variable input while keeping other inputs fixed.

Diminishing Marginal Returns?

The point at which adding extra units of a variable input (e.g., workers) to a fixed input (e.g., a factory) results in smaller and smaller additions to total output.

How do diminishing marginal returns lead to an upward-sloping supply curve?

Falling marginal product means more input is needed to produce each extra unit of output, which causes the marginal cost (MC) to rise. A firm will only be willing to produce and supply more if the price increases to cover this rising MC, creating an upward-sloping short-run supply curve.

Why is the textbook model of the supply curve considered an oversimplification?

In reality, marginal cost (MC) is often flat, not rising. In mass production, costs per unit can be constant, and economies of scale can even cause costs to fall as output increases. Furthermore, firms' pricing decisions are based on strategy and market power, not just MC.

Rational Consumer Choice

The idea that consumers make decisions by weighing costs and benefits to maximize their satisfaction (utility).

Anchoring Bias

Relying too much on the first piece of information you see (the “anchor”) when making a decision.

Rules of Thumb Bias

Using simple mental shortcuts (like “buy the cheapest” or “pick the middle option”) instead of fully analyzing.

Framing Bias

Decisions change depending on how the same information is presented (e.g., “90% fat-free” sounds better than “10% fat”).

Availability Bias

Overestimating the likelihood of something because examples easily come to mind (e.g., fearing plane crashes after seeing one in the news).

Bounded Rationality

People can’t process all information, so they make “good enough” decisions instead of perfectly rational ones.

Bounded Selfishness

People aren’t purely selfish; they sometimes act with fairness, generosity, or concern for others.

Bounded Self-Control

Even when people know what’s best (like saving money or dieting), they struggle to resist short-term temptations.

Nudge Theory

Small changes in how choices are presented can “nudge” people toward better decisions without removing freedom (e.g., putting fruit at eye level in a cafeteria).

Choice Architecture

The way choices are organized or presented, which influences decisions (e.g., menu layout, website design).

Default Choice

The option automatically chosen if the consumer does nothing (e.g., being automatically enrolled in a pension plan).

Restricted Choice

 Limiting the number of options to prevent overwhelm and make decision-making easier.

Mandated Choice

People are required to actively make a choice (e.g., when getting a driver’s license, you must decide yes/no on organ donation).