Microeconomics Consumer Behaviour


Utility Theory: Total & Marginal Utility, & Law of

- When consumers make economic decisions, they think in terms of maximising their own utility, whereas firms aim to maximise their profits 

CONSUMER'S UTILITY: Total satisfaction recieved from consuming a good or service

MARGINAL UTILITY: Extra satisfaction from consuming one extra unit of good/service

- On a demand curve, it slopes downwards as there is diminishing marginal utility 

LAW OF DIMINISHING MARGINAL UTILITY: Suggests that comsumer's marginal utility decreases with extra units consumed as it generates less utility than the last one consumed. Therefore, consumers are willing to pay less for extra units consumed. 


- It is assumed that economic agents act in their own interests 

- Maximising utility is when consumers aim to generate the highest amount of utility possible from each economic decision they make and firms aim to maximise their profits as much as possible. 

- Some firms have philanthropic owners (owners who seek to promote charitable causes) to try and raise the utility of others (and increase profits)

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Rational Economic Decision Making & Economic Incen

- Economic agents respond to incentives, which means they may allocate scarce resources to provide the highest utility to each agent e.g. an entrepreneur's incentive for taking risk is profit 

REWARDS: Positive incentives which make consumers better off 

PENALTIES: Negative incentives which make consumers worse off 

- If incentives aren't given appropiately, resources could be misallocated 

- Prices give signals to buyers and sellers, which incentivises them to either buy or sell the good e.g. high demand & high price will give firms an incentive to allocate more resources to produce the good 

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Making Decisions (economic decision making & econo

Making decisions using INTUITION: A decision made with feelings / instincts instead of facts 

Making decisions RATIONALLY: Decisions made with several steps, involving analysis & facts 


1. Identify the problem (could be falling profits for a firm)

2. Find & identify decision criteria (find criteria to increase profits e.g. increasing prices)

3. Weigh up criteria (rank criteria in order of relative importance)

4. Generate alternatives (consider alternative options)

5. Evaluate alternative options (consider which alternatices meet the criteria the best)

6. Choose the best alternative 

7. Carry out the decision (now identify the consequences)

8. Evaluate the decision (consider if this was the best option after all)

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Limitations of Rational Decision Making Model

It isn't always the best or realistic way to make decisions as it;

          - can take a long time to make which isn't practical when there are deadlines 

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Importance of the Margin When Making Choices

- It means when people have to think about the effect of an additional action

- Actions could be described as involving a marginal increase in a product or marginal cost e.g. working for 1 more hour could produce 6 extra units so each extra unit costs 10mins 

- Thinking at the margin is important as consumers can think ahead (and to consider how to maximise their utility now/in the future) instead of thinking of what they have already done 

- Margins can also increase productivity as the most important tasks which create the biggest increase in utility are prioritised.

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