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Chapter 6-7

The document discusses rational decision-making in economics, highlighting that economic agents aim to maximize utility, welfare, or profits. It also explores factors that may lead consumers to behave irrationally, such as herding and bias, and explains the concept of demand, including the demand curve and shifts in demand. Additionally, it covers the law of diminishing marginal utility and the concept of consumer surplus.

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Lambert Wang
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20 views

Chapter 6-7

The document discusses rational decision-making in economics, highlighting that economic agents aim to maximize utility, welfare, or profits. It also explores factors that may lead consumers to behave irrationally, such as herding and bias, and explains the concept of demand, including the demand curve and shifts in demand. Additionally, it covers the law of diminishing marginal utility and the concept of consumer surplus.

Uploaded by

Lambert Wang
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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6 RATIONAL DECISION MAKING

1 key assumptions of neo-classical theory

1) Economic agents make decisions in a rational way.

2) By making rational choices:

• consumers aim to maximise utility;

• workers aims to maximise their own welfare at work;

• firms aim to maximise profits.


2 why consumers may not aim to maximise utility?

• the influence of other people’s behaviour (herding)

• habitual behaviour

• inertia

• poor computational skills

• the need to feel valued

• framing and bias.


Questions

1 What does ‘rational’ mean in economics?

2 Give three examples, different to those in the text, of how consumers may not behave rationally.
7 DEMAND
1 The concept of ‘demand’

Demand is the quantity of goods or services that will be bought at any given price
over a period of time.

2 The demand curve

• downward sloping, an inverse (opposite) relationship


between price and quantity demanded

• 横坐标：quantity demanded

• 纵坐标：price
3 Movements along a demand curve

1) Extension of demand

A situation where quantity increases as price falls. (B to A)

2) Contraction of demand

A situation where quantity decreases as price increases. (A to B)

3) Price factor cause a movement along a demand curve


4 Shift of demand curve

1) Conditions of demand (non-price factor) cause a shift in the demand curve

• changes in the price of substitutes or complementary goods

• changes in real income

• changes in tastes

• changes in size and age distribution of the population

• advertising.

2) Shift to the right or left

• Shift to the right Increase in demand

• Shift to the left Decrease in demand


5 Diminishing marginal utility

1) Law of diminishing marginal utility

The value, or utility, attached to consuming the last product bought falls as more units are
consumed over a given period of time

2) Law of diminishing marginal utility and shape of individual demand curve

• The law of diminishing marginal utility explains why the demand curve is downward sloping.

• The higher the quantity bought, the lower the marginal utility derived from consuming the product.

• So, buyers will only pay low prices for relatively high amounts purchased, but they will pay higher
prices if the quantity is lower.
6 Consumer surplus

Consumer surplus is the difference between the value to buyers and what they actually pay.

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