AQA Economics Year 1: Consumer Behaviour

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Questions and Answers

What is the assumption behind the rational consumer behaviour model?

Consumers have unlimited budget

Consumers always prioritize needs over wants

Consumers make all choices independently (correct)

Consumers always make impulsive decisions

What is the goal of rational consumers in their decision-making process?

To maximize their utility (correct)

To minimize their spending

To satisfy their basic needs

To follow their friends' purchasing patterns

What does the Law of Diminishing Marginal Utility explain?

Why consumers always buy more units of a good

Why the extra satisfaction gained from consuming more units of a good diminishes (correct)

Why consumers always prefer domestic products

Why the demand curve slopes upward

What is marginal utility?

The change in total utility from consuming an extra unit of a product Signup and view all the answers

What is the result of the Law of Diminishing Marginal Utility on the demand curve?

The demand curve slopes downward Signup and view all the answers

What do rational consumers calculate when making decisions?

Marginal cost and marginal benefit Signup and view all the answers

What occurs when people have inaccurate, incomplete, uncertain, or misunderstood data?

Information failure Signup and view all the answers

What type of information occurs when buyers and sellers have the same perfect information?

Symmetric information Signup and view all the answers

What occurs when people taking out insurance are often those at highest risk?

Adverse selection Signup and view all the answers

What can make people more careless due to being insured?

Moral hazard Signup and view all the answers

What type of information occurs when either the buyer or seller lacks information needed for a fully-informed decision?

Information gap Signup and view all the answers

What is the primary reason behind the principal-agent problem?

The goals of the principals are different from the agents Signup and view all the answers

What is the main purpose of government policies in addressing information failure or gaps?

To improve information to help producers and consumers make more accurate decisions Signup and view all the answers

What is an example of a government policy that addresses information failure or gaps?

Compulsory labelling on products Signup and view all the answers

What is a potential consequence of government policies?

The government may act on poor or incomplete information, leading to government failure Signup and view all the answers

What is an example of a campaign that addresses information failure or gaps?

Campaigns to raise awareness of risks for selling used products of drink-driving, drug abuse, or smoking Signup and view all the answers

What is the primary purpose of industry standards and guarantees?

To protect consumers by ensuring certain quality standards Signup and view all the answers

Study Notes

Rational Consumer Behaviour

Consumers aim to maximize utility (satisfaction) within their budget constraints when making purchasing decisions.
Consumers are assumed to be rational, meaning they weigh the costs and benefits of each option to make the most logical choice.
Consumers utilize the Law of Diminishing Marginal Utility to guide their decision-making.

The Law of Diminishing Marginal Utility

The Law of Diminishing Marginal Utility explains how the additional satisfaction consumers derive from consuming one more unit of a good decreases as consumption increases.
Marginal utility is the extra satisfaction gained from consuming one more unit of a good or service.
As consumption increases, the marginal utility gained from each additional unit declines, causing the demand curve to slope downwards.

Decision-Making Under Imperfect Information

Rational consumers make calculations based on cost-benefit analysis, comparing the cost of a good or service to the anticipated benefit.
When people have inaccurate, incomplete, uncertain, or misunderstood data, their decisions may be suboptimal and lead to adverse outcomes.
Symmetric Information refers to situations where buyers and sellers have the same perfect information, leading to efficient market outcomes.
Asymmetric Information describes situations where either the buyer or seller lacks information needed for a fully-informed decision.

Information Failures and Adverse Selection

Adverse selection arises when people taking out insurance are often those at highest risk, leading to higher premiums and a potential under-provision of insurance.
Moral Hazard occurs when individuals are more careless due to being insured, as they bear a lower cost for risky behavior.
The principal-agent problem occurs because the agent, acting on behalf of the principal, may not have the principal's best interests at heart, potentially leading to conflict and suboptimal outcomes.

Government Policies and Information Gaps

Government policies address information failure or gaps to ensure consumers make informed decisions and markets function efficiently.
Examples of government policies include:
- Mandating labeling requirements on food products, enhancing consumer awareness of nutritional content.
These policies can have unintended consequences, which must be carefully considered.
Campaigns like "Know Your Rights" aim to address information failure or gaps regarding consumer rights and protections.

Industry Standards and Guarantees

Industry standards and guarantees provide clear information and assurances to consumers about product quality and performance, enhancing trust and confidence in the market.

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Description

Test your understanding of consumer behaviour in AQA Economics Year 1, including rational consumer behaviour, Law of Diminishing Marginal Utility, and the assumptions of consumer decision-making. Learn how consumers make choices to maximise utility and more.