The Consumer
What is the role of the consumer in the economy?
The role of the consumer is to demand goods and services, spend income on goods and services, and pay indirect taxes. One consumer’s spending becomes another individual’s income.
List 3 out of five main assumptions underlying consumer behaviour?
Consumers have limited income but unlimited wants.
Consumers must make choices about how to spend their limited income.
Consumers are assumed to be rational.
Consumers spend their income on economic goods.
Consumers are subject to the Law of Diminishing Marginal Utility.
What is Price Elasticity of Demand (PED)
PED measures the percentage change in quantity demanded resulting from a percentage change in price.
What is utility, and how is it measured?
Utility is the benefit or satisfaction an individual receives from consuming a good or service. It is measured in units called utils.
What is a rational consumer, and why is this assumption not always realistic?
A rational consumer makes logical purchasing decisions to achieve the greatest satisfaction from their limited income. This assumption is not always realistic because advertising, marketing and emotions can influence consumers to purchase unnecessary goods.
How is Price Elacticity of Demand calculated?
PED=ΔP/ΔQ × Q1+Q2/P1+P2
What is the difference between total utility and marginal utility?
Total utility: The total satisfaction gained from consuming a number of units of a good or service.
Marginal utility: The extra satisfaction gained from consuming one additional unit of a good or service.
What is an impulse purchase?
An impulse purchase is a purchase made spontaneously, without being planned in advance. It is often driven by emotions rather than rational decision-making.
Why is PED usually negative?
PED is usually negative because of the Law of Demand.
When price rises, quantity demanded generally falls, and when price falls, quantity demanded generally rises. This creates an inverse relationship between price and quantity demanded.
What is consumer sentiment, and what are its two types?
Consumer sentiment refers to how optimistic or pessimistic consumers feel about the economy.
Optimistic: Consumers feel confident and tend to spend more.
Pessimistic: Consumers feel less confident and tend to spend less.
What is an economic good, and what three features must it have?
An economic good is a good that provides satisfaction (1.utility), is relatively scarce (2.scarcity) and can be transferred (3.transferrable) to another person.
Explain the difference between a relatively elastic good and a relatively inelastic good.
Relatively elastic demand: The percentage change in quantity demanded is greater than the percentage change in price. The absolute value of PED is greater than 1.
Relatively inelastic demand: The percentage change in quantity demanded is smaller than the percentage change in price. The absolute value of PED is less than 1 but greater than 0.
How can the government influence consumer behaviour, give an example of of each.
Incentives and taxation
For example, it can increase indirect taxes to discourage the consumption of certain goods or provide incentives to encourage particular types of spending.
What is the Law of Diminishing Marginal Utility (LDMU)
As a consumer consumes more units of a good, the extra satisfaction gained from each additional unit will eventually decline.
What is Unitary Elastic demand?
The percentage change in quantity demanded equals the percentage change in price.
PED is −1.
Demand curve is a steady slope down.