Acctg Ch 4 Flashcards
An individual’s pleasure, happiness, or satisfaction is called?
Utility
This theory argues that individual consumption decisions are always made because people desire to maximize their satisfaction from consuming various goods and services.
Consumer Theory
What is the 1st assumption when measuring satisfaction?
The spending on any good or service is exactly equal to the individual’s savings and income.
What is the 2nd assumption when measuring satisfaction?
People are aware of the range of products available in the market
What is the 3rd assumption when measuring satisfaction?
People are aware of the prices of products in the market
What is the 4th assumption when measuring satisfaction?
People are aware of the capacity of the product.
These are certain combinations of 2 commodities that will yield them a certain level of utility.
Combination Bundle
-This forms the Indifference Curve
The indifference curve depicts values that are considered by what?
Considered by the Utility Function
This function shows an individual’s value of the utility attained from consuming each conceivable bundle of goods.
Utility Function
This type of value of the utility function are based on the number of “util” or the unit of satisfaction. Also the most wildly used way in identifying utility.
Cardinal Values
This law argues that as you increase your intake of a certain commodity, you will have a declining satisfaction on the next units of the same commodity that you would consume.
Law of diminishing marginal utility
This type of value of the utility function are based on rankings.
Ordinal Values
This is the maximum amount of a good that a consumer is willing to give up to obtain one additional unit of another good.
MRS or Marginal Unit of Substitution
What is the formula of MRS?
MRS equation is
Average change in the values of commodity y
—————————–
Average change in the values of commodity X
^ that is equal to
Marginal Utility of X
What are the 3 properties of consumer preferences that we have to take note of?
- Completeness
- Transitivity
- Non-Satiation
If X is preferred to Y, and Y is preferred to Z.
Then X must be preferred to Z.
That example describes what property?
Transitivity
With a pair of bundles (x&Y)
Its either
X is preferred to Y
Y is preferred to X
The consumer is indifferent to both (both have equal value to the consumer)
What property does that example describe?
Completeness
This property can be summarized with “more is better”
Non-Satiation
This graph contains a set of indifference curves showing two commodities among which describe a person’s preference.
Indifference Map
What happens when 2 indifference curves intersect?
It violates one of the assumptions of the consumer theory
What is a budget line?
Graph that shows the combination of goods and services of a person where the total amount of money spent is proportionate to their income. (It assumes that everyone spends their income)
What happens to a budget line when income increases/decreases
It shifts to the right/left in parallel
What happens to a budget line when price increases/decreases
Increase of price of good x makes the line rotate clockwise
Decrease of price of good x makes the line rotate counter clockwise
To maximize the utility of an individual, it must satisfy 2 conditions. Those are?
- The decision must lie on the budget line
- The decision must lie on the indifference curve (That also depicts the most preferred combination)
This curve shows the relationship between the amounts of products that people are willing to buy and their income
Engels Curve
Can indifference curves intersect?
No
It is the study of individuals, groups, organizations, and all the activities associated with the purchase, use, and disposal of goods and services.
Consumer Behavior
The change in consumption that results when a price change moves the consumer to a higher or lower indifference curve.
Income Effect
The change in consumption that results when a price change moves the consumer along a given indifference curve to a point with a new marginal rate of substitution.
Substitution Effect
