The theory of consumer choice assumes consumers wish to maximise their utility through the optimal combination of goods – given their limited budget. To illustrate how consumers choose between different combinations of goods we can use equi-marginal principle and indifference curves and budget lines. Consumer equilibrium – equimarginal principle Consumer Equilibrium occurs when the marginal …
Distributive efficiency occurs when goods and services are consumed by those who need them most. Distributive efficiency is concerned with an equitable distribution of resources because of the law of diminishing marginal returns. The Law of diminishing marginal returns states that as consumption of a good increase we tend to get diminishing marginal utility. For …
This is an aspect of consumer behaviour theory which states consumers will stick with regular spending patterns and we are much more likely to choose the easiest option we are given In the real world, we often purchase the goods/services that are presented as the automatic default choice. – We don’t take option to opt-out …
A look at whether we actually need economic growth in a modern economy. Readers Question: When I compare my life with my fathers at that time the conditions are near identical in the greater things or life. I work the same hours, maybe more. I have the same holidays. I have a similar standard of …
Readers Question: Pareto efficiency occurs (as you say) ‘when it is impossible to make one party better off without making someone worse off’. Assume (and Economics seems to do this a lot) two people live in the world. One is a multi-billionaire and the other has no money at all. If the rich guy gives …
Definition of Pareto efficiency Pareto efficiency is said to occur when it is impossible to make one party better off without making someone worse off. A Pareto improvement is said to occur when at least one individual becomes better off without anyone becoming worse off. Pareto efficiency will occur on a production possibility frontier. When …
This is a concept that individuals have two different sets of decision-making processes. The first is impulsive, fast and acts without thinking. The first is impulsive, fast, emotional and acts without thinking – but relies on heuristics and past knowledge/experience. The second element of our decision-making system is a more cognitive, deliberate, thinking process which …
Homo Economicus is a hypothetical concept that humans are: Self-interested Know what they want Make rational choices to maximise their utility. These choices are based on the concept of marginal utility. This concept of a rational economic man is an important cornerstone of neo-classical economic theory. It creates a framework to model how consumers and …