Chapter 2 Flashcards
Consumer’s preference
Ranking over all possible combinations (of A & B)
Indifference curve
a line connecting all such points about which we are indifferent (same utility)
Budget set + Forrmula Y & qA
Y => paqa + pbqb * & qa = (y/pa) - (pb/pa)*qb
When is utility maximized?
Where the indifference curve is tangent to the budget line
Willingness to pay
The maximum price at which one still wants to buy (q=o)
Consumer Surplus
(willingness to pay - price) * quantity * 0.5 - area under the demand curve and above the price paid by the consumer
Elasticity of demand
(dq/dp) * (p/q)
When is demand: elastic, inelastic, vertical, horizontal
elasticity > 1, 0 < elasticity < 1, elasticity = 0 , elasticty = - infinity
Cross-price elasticity & when substitutes / complements
(dq1/dp2) * (p2/q2) - substitutes if elasticity > 0, complements if elasticity < 0
income elasticity & type of goods
etha (n) = (dq/dy) * (y/q)
etha < 0: inferior good
etha > 0: normal good, 0 < n < 1: necessity, n > 1: luxury
Instrumental variables
Are correlated with the supply curve but uncorrelated with the demand curve
If it were positively correlated, it would overestimate the elasticity
If it were negatively correlated, it would underestimate the elasticity
Prospect theory
The theory that preferences depend on reference points
Failures of the model of consumer rationality
1) Consumers are more sensitive to losses than to gains
2) Future-utility forecasting
3) Many consumer transactions are considerably more complex
Failures of the model of consumer rationality
1) Consumers are more sensitive to losses than to gains
2) Future-utility forecasting
3) Many consumer transactions are considerably more complex
