3.1.2 Individual economic decision making

What is the importance of the margin when making choices?

• Margin: change in a variable caused by an increase of one unit of another variable (e.g. marginal cost of bread is the additional cost of making an additional unit). It’s important in understanding how consumers act rationally

What is utility theory?

• Marginal utility: benefit gained from consuming one additional unit of a good

• Total utility: overall benefit gained from consuming a good

• Law of diminishing marginal utility: for each additional unit of a good that’s consumed, the marginal utility gained falls

What is utility maximisation?

• Assumed by traditional economic theory that all economics agents (e.g. producers, consumers) want to maximise their utility (e.g. profit, satisfaction)

What is rational economic decision making and economic incentives?

• Assumed by traditional economic theory that economic agents must act rationally/make decisions soley based on trying to gain maximum utility and nothing else influences their decision making