Questions and Answers
What is the assumption underlying consumer behaviour that states that consumers have limited financial resources and unlimited wants?
Consumers have limited incomes and unlimited wants.
What is the term for the cost of giving up the next best alternative when making a choice?
Opportunity cost
What is the characteristic of a rational consumer?
A rational consumer is one that is reasonable and logical, making purchasing decisions using intelligent thinking rather than acting off of emotion.
What are the three characteristics of economic goods?
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What is the Law of Diminishing Marginal Utility, and what are the assumptions underlying it?
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What is the role of the consumer in the economy, and what are the consequences of consumer demand?
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What is the Equi-Marginal Principle of consumer behaviour?
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What is consumer sentiment, and what are the consequences of positive consumer sentiment?
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What is the consequence of consumers making choices based on rational thinking?
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What is the result of consumer spending on national income?
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What is the main reason why consumers make choices in the market?
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How do consumers decide which goods to purchase according to the economic theory?
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What is the main characteristic of economic goods?
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What happens to the marginal utility of a good as a consumer consumes more units?
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What is the purpose of the Equi-Marginal Principle?
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What is the impact of consumer demand on employment?
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What is the effect of positive consumer sentiment on consumer spending?
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What is the role of consumers in indicating what goods and services are wanted?
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What is the consequence of consumer demand on national income?
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What is the relationship between consumer demand and taxes paid by suppliers?
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Study Notes
Assumptions Underlying Consumer Behaviour
- Consumers have limited incomes and unlimited wants, leading to the need for making choices and considering opportunity costs.
- Consumers are assumed to be rational, making purchasing decisions based on intelligent thinking rather than emotions.
- Rational consumers only purchase goods and services that maximize utility.
- Consumers spend their limited income on economic goods, which provide utility, are relatively scarce, and command a price.
- Economic goods are transferable.
Law of Diminishing Marginal Utility
- The Law of Diminishing Marginal Utility states that as a consumer consumes more units of a good, the extra satisfaction or marginal utility derived from each additional unit will eventually decline.
- Exceptions to the Law of Diminishing Marginal Utility include:
- Addictive or medical goods.
- Situations where time has passed.
- Changes in income.
Role of the Consumer
- Consumers demand goods and services, and firms supply them.
- Consumers indicate their preferences to suppliers through their purchasing decisions.
- Consumers pay indirect taxes to the government, such as VAT.
Demand for Goods and Services
- Results in employment opportunities.
- Generates profits for entrepreneurs.
- Leads to taxes paid by suppliers.
- Contributes significantly to national income.
Equi-Marginal Principle
- A consumer who wants to maximize utility will allocate their limited income so that the ratio of marginal utility to price is equal for all goods they consume.
Consumer Sentiment
- Is a mathematical measure of the economy's health based on consumer opinion.
- Positive consumer sentiment:
- Consumers are optimistic about the future.
- Leads to increased demand.
- Consumers save less.
- Contributes to economic growth.
- Negative consumer sentiment:
- Consumers are pessimistic about the future.
- Leads to decreased demand.
- Consumers save more.
- Contributes to economic downturn.
Assumptions Underlying Consumer Behaviour
- Consumers have limited incomes and unlimited wants, leading to the need for making choices and considering opportunity costs.
- Consumers are assumed to be rational, making purchasing decisions based on intelligent thinking rather than emotions.
- Rational consumers only purchase goods and services that maximize utility.
- Consumers spend their limited income on economic goods, which provide utility, are relatively scarce, and command a price.
- Economic goods are transferable.
Law of Diminishing Marginal Utility
- The Law of Diminishing Marginal Utility states that as a consumer consumes more units of a good, the extra satisfaction or marginal utility derived from each additional unit will eventually decline.
- Exceptions to the Law of Diminishing Marginal Utility include:
- Addictive or medical goods.
- Situations where time has passed.
- Changes in income.
Role of the Consumer
- Consumers demand goods and services, and firms supply them.
- Consumers indicate their preferences to suppliers through their purchasing decisions.
- Consumers pay indirect taxes to the government, such as VAT.
Demand for Goods and Services
- Results in employment opportunities.
- Generates profits for entrepreneurs.
- Leads to taxes paid by suppliers.
- Contributes significantly to national income.
Equi-Marginal Principle
- A consumer who wants to maximize utility will allocate their limited income so that the ratio of marginal utility to price is equal for all goods they consume.
Consumer Sentiment
- Is a mathematical measure of the economy's health based on consumer opinion.
- Positive consumer sentiment:
- Consumers are optimistic about the future.
- Leads to increased demand.
- Consumers save less.
- Contributes to economic growth.
- Negative consumer sentiment:
- Consumers are pessimistic about the future.
- Leads to decreased demand.
- Consumers save more.
- Contributes to economic downturn.
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Description
Test your understanding of the fundamental assumptions underlying consumer behaviour, including limited incomes, opportunity cost, rational decision-making, and utility maximization.
