CH 6,7,8 Flashcards
Law of Diminishing Marginal Utility
The happiness a consumer gets from consuming successive amounts of a particular product overtime diminishes as total consumption increases
Marginal Utility
The satisfaction that a consumer gets from consumer one more additional unit of that product/good
Total Utility
The total happiness that a consumer gets from all the units of the good consumed
Marginal Utility Equation
change in total utility/ change in quantity (slope of TU/ derivative)
Maximizing total utility formula
(MUX/PX)=(MUY/PY)
How do you derive the demand curve? Why do you not add the household demands vertically?
Substitution Effect, Explain, NEG OR POS RELATIONSHIP? What causes it ?
The change in QD from a good who’s price has risen to a good who’s price has fallen (PX INC, THEN QDX DEC) NEGATIVE RELATIONSHIP, caused by change in price
Income Effect
how does it impact consumption of normal and inferior goods, what causes it and why does that cause it?
The change in QD as a result of a consumers reaction to change in income. (Y INC, THEN QD NORMAL GOOD INC, AND QD OF INFERIOR GOOD DEC), caused by changes in price
what causes the total effect on the demand curve (deriving the demand curve)
Substitution effect + Income effect.
The magnitude of the income effect depends on
The proportion of income spent on the good and the magnitude of the price change
Normal good, define it, explain elasticity, give an example
necessity or regular consumption item, income elasticity of demand positive, INC INCOME, INC QD,
EXAMPLE: BEER
Inferior good, define it, explain elasticity, give example
a low cost substitute to a normal good, not as good quality, Income elasticity or demand is negative because as INCOME INC, QD, DECREASES
GIFFEN GOOD- define and explain a situation!
explain substitution and income effect for it
positively sloped demand curve, when prices increases so does demand.
income elasticity is very negative
inferior good
Substitution effect negative
good takes up a large proportion of household income such that the income effect offsets the subst. effect
Cost-Benefit, marginal principle
Take action when Marginal benefit exceeds marginal cost
Conspicuous Good
Definition
as relative prices increases, the consumer wants, more because happiness is relative. for those who consume conspicuous goods, there is snob appeal and it acts as a status symbol for them. They get happiness when they pay more for the item because it helps them achieve a higher social status in society
