Chapter 2 - Consumers Flashcards

1
Q

Consumer’s preferences can be described by…

A

a ranking over all possible combinations of A and B

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2
Q

indifference curve

A

the line connecting all such points about which we are indifferent from choosing A or B

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3
Q

features of indifference curves

A

downward-sloping: need more of a product to compensate us for less of the other (“more is better”)
farther from the origin = higher levels of satisfaction

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4
Q

budget set

A

what the consumer can afford
with 2 products, a budget set can be expressed by:
p1q1+p2q2 ≤ Y

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5
Q

movements/shifts of the budget line

A
  • increase income = budget line shifts out to the right
  • if you increase p1 the line rotates inwards with respect to product 1’s quantity axis
  • > buy less product with the same income
  • > same thing for product 2
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6
Q

Consumers always want to maximise their utility. Then the consumer’s best choice is…

A

… the combination of goods that allows them to reach the highest indifference curve given their budget constraint.

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7
Q

demand curve

A

gives the quantity demanded of a given good as a function of its price and of other factors

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8
Q

inverse demand function

A

denotes what the price must be if the quantity demanded is to be equal to q.
demand as a function of q; p(q,z)

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9
Q

a change in price leads to a (1) along the demand curve; a change in other factors leads to a (2) in the demand curve itself

A
  1. movement

2. shift

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10
Q

willingness to pay

A

the maximum price (in dollars) at which you would still want to buy the product

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11
Q

consumer surplus

A

the difference between the willingness to pay and price.

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12
Q

Price elasticity of demand

A

measurement of the sensitivity of demand to changes in price

the ratio between the percentage change in quantity and the percentage change in price, for a small change in price

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13
Q

price elasticity of demand formula

A
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14
Q

demand elasticities are generally negative, as…

A

…an increase in price leads to a decrease in demand

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15
Q

|ϵ|>1

A

elastic demand

demand is very sensitive to price

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16
Q

zero< |ϵ| <1

A

demand is inelastic

quantity demanded is relatively insensitive to price

17
Q

elasticity along the demand curve

A
18
Q

Cross-price elasticity

A

measures the sensitivity of demand to the price of another product

19
Q

the cross price elasticity of product x with respect to product y is given by the ratio of the percentage change in the quantity demanded of product x to the percentage change in the price for product y

A
20
Q

cross-price elasticity is positive

A

substitutes

21
Q

cross-price elasticity is negative

A

complements

22
Q

income elasticity

A

percentage change in quantity demanded induced by a 1% change in income

23
Q

inferior goods

A

negative income elasticities

24
Q

normal goods (luxury and necessities)

A

positive income elasticities
luxury goods = i.e. greater than one
necessities = i.e. between 0 and 1

25
Q

income elasticity formula

A

η = (Δq/q)/(ΔY/Y)

26
Q

identification problem

A

states that market data results from a combination of demand-curve and supply-curve shifts; if only one would shift around, we would be able to identify the other one

27
Q

the price elasticity of demand tends to be higher for…

A

… luxuries, for narrow product categories, and in the long run