Theory and Definitions:
- The Consumer: the decision making unit that buys good and services.
- Consumers supply land, labour,capital and enterprise for which they get rent, wages, interest(because of the money they provide for investment needed to buy capital) and profit.
- Transfer payments are payments to those individuals that do not provide any factors of production in return.
- Utility is the satisfaction gained from consuming goods and services.
- Law of Diminishing Marginal Utility states that as more units of a good are consumed, the marginal utility eventually begins to decline.
- The Equimarginal Principle states that for maximum utility, a rational consumer will spend his money in such a way that the ratio of MU to price is the same for all goods consumed.
- Consumers gain income. Income is a flow of wealth over a period of time earned by a person.
- But wealth is the stock of assets they own at any given time.
- income can be recieved in non cash forms called benefit in kind.
- Welfare is not really an economic concept because it refers to the overall well being of an individual.
- A rational consumer is one that spends his income to try and maximise utility.
Assumptions concerning consumer behaviour:
- Limited Income Infinite wants.
- Has to choose. There will be opportunity cost.
- They buy only Economic Goods
Features of Economic Goods:
- must give utlity
- must be scarce
- must be sellable e.g. not intelligence
Exceptions to Law of Diminishing Returns:
- Knowledge and books
- Alcohol addiction
- Petrol or neccessity
Reasons for buying stuff:
- Demand. You want to use it
- Impulse. Bad good, good advertising
- Exclusive. Rolex watches
- Speculative. Good go up value/price in future. Gotta buy it now.
- Bandwagon. Get what neighbour has.
- Gifts. You want to be nice to people.
[MU1/P1 = MU2/P2 = …MUn/Pn] Law of Equi Marginal Returns.