CHAP. 6 Flashcards
WHAT IS UTILITY?
The satisfaction that a consumer receives from consuming some good or service.
WHAT IS TOTAL UTILITY
The consumer’s total satisfaction resulting from the consumption of a given product.
WHAT IS MARGINAL UTILITY
The additional satisfaction obtained from consuming one additional unit of a product.
WHAT TENDANCY DOES THE MARGINAL UTILITY HAVE
Deminishing marginal utility:
The utility that any consumer derives from successive units of a particular product consumed over some period of time diminishes as total consumption of the product increases.
WHY IS MUx ALWAYS POSITIVE AND Ux ALWAYS POSITIVELY SLOPED
Because x is a good
WHAT DO CUSTOMERS SEEK TO DO
Consumers seek to maximize their total utility subject to the constraints they face
WHAT CONSTRAINTS DO CUSTOMERS FACE
Their income and the market price
HOW DO CUSTOMERS MAXIMIZE THEIR UTILITY
A utility-maximizing consumer allocates expenditures so that the marginal utility obtained from the last dollar spent on each product is equal
WHAT IS THE UTILITY-MAXIMIZING CONDITION
MUx/Px = MUy/Py or MUx/MUy = Px/Py
WHAT ARE POLICY NUDGES
Interventions that preserve freedom of choice, but that also steer people in certain directions
WHAT IS THE HYPOTHESIS OF DEMINISHING MARGINAL UTILITY
As a consumer buys less of a product, the marginal utility rises
WHAT HAPPENS WHEN PRICE OF x RISES
A rise in the price of a product leads each utility-maximizing consumer to reduce the quantity demanded of the product
WHAT DOES THE THEORY OF CONSUMER BEHAVIOR PREDICT?
A negatively sloped market demand curve as well as a negatively sloped demand curve for each individual consumer.
WHICH TWO EFFECTS DOES THE CHANGE IN PRICE HAVE
It alters the relative price and it changes consumers’ real income.
WHAT IS THE REAL INCOME
Income expressed in terms of the purchasing power of money income—that is, the quantity of goods and services that can be purchased with the money income.
WHAT IS THE SUBSTITUTION EFFECT
The change in the quantity of a product demanded resulting from a change in its relative price (holding real income constant).
WHAT IS THE EFFECT OF THE SUBSTITUTION EFFECT
The substitution effect increases the quantity demanded of a product whose price has fallen and reduces the quantity demanded of a product whose price has risen.
WHAT IS THE INCOME EFFECT
The change in the quantity of a product demanded resulting from a change in real income (holding relative prices constant).
WHAT IS THE EFFECT OF THE INCOME EFFECT
The income effect leads consumers to buy more of a product whose price has fallen, provided that the product is a normal good.
THE INCOME EFFECT DEPENDS ON WHAT
The amount of income spent on the product whose price changes and on the amount by which the price changes.
WHAT ARE GIFFEN GOODS?
- Products with a positively sloped demand curve
- Two characteristics : inferior good and take a large proportion of total household expenditure (large income effect)
HOW DO THE SUBSTITUTION AND INCOME EFFECT AFFECT THE QUANTITY DEMANDED
For any ordinary goods :
- Normal goods: the sub and inc effect work in the same way
- Inferior goods: the sub and inc effect work in opposite ways but the sub effect is greater
For any Giffen goods (the demand curve is positively sloped)
- Some inferior goods: the sub and inc effect work in opposite ways but the inc effect is greater
WHAT IS THE CONSUMERS SURPLUS
The difference between the total value that consumers place on all units consumed of a product and the payment that they actually make to purchase that amount of the product.
WHAT SHOWS THE TOTAL VALUE THAT A CUSTOMER PLACES ON A GOOD
The area under the demand curve
WHAT SHOWS THE MARKET DEMAND CURVE
The valuation that consumers place on each unit of the product
WHAT SHOWS THE CONSUMER SURPLUS
For any given quantity, the area under the demand curve and above the price line
