The Consumer Notes

Theory and Definitions:

  1. The Consumer: the decision making unit that buys good and services.
  2. 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.
  3. Transfer payments are payments to those individuals that do not provide any factors of production in return.
  4. Utility is the satisfaction gained from consuming goods and services.
  5. Law of Diminishing Marginal Utility states that as more units of a good are consumed, the marginal utility eventually begins to decline.
  6. 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.
  7. Consumers gain income. Income is a flow of wealth over a period of time earned by a person.
  8. But wealth is the stock of assets they own at any given time.
  9. income can be recieved in non cash forms called benefit in kind.
  10. Welfare is not really an economic concept because it refers to the overall well being of an individual.
  11. A rational consumer is one that spends his income to try and maximise utility.


Assumptions concerning consumer behaviour:

  1. Limited Income Infinite wants.
  2. Has to choose. There will be opportunity cost.
  3. Rationality
  4. They buy only Economic Goods

Features of Economic Goods:

  1. must give utlity
  2. must be scarce
  3. must be sellable e.g. not intelligence

Exceptions to Law of Diminishing Returns:

  1. Knowledge and books
  2. Alcohol addiction
  3. Medecine
  4. Petrol or neccessity

Reasons for buying stuff:

  1. Demand. You want to use it
  2. Impulse. Bad good, good advertising
  3. Exclusive. Rolex watches
  4. Speculative. Good go up value/price in future. Gotta buy it now.
  5. Bandwagon. Get what neighbour has.
  6. Gifts. You want to be nice to people.


[MU1/P1 = MU2/P2 = …MUn/Pn] Law of Equi Marginal Returns.


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