Chapter 4 Flashcards
Indifference Curve
a curve that defines the combinations of two goods that give a consumer the same level of satisfaction
Marginal Rate of Substitution
the rate at which a consumer is willing to substitute one good for another and still maintain the same level of satisfaction
Budget set
the bundles of goods a consumer can afford
Budget line
the bundles of goods that exhaust a consumer’s income
Market of Substitution
the rate at which one good may be traded for another in the market; slope of the budget line
Consumer Equilibrium
the equilibrium consumption bundle is the affordable bundle that yields the greatest satisfaction to the consumer
Substitution Effect
the movement along a given indifference curve that results from a change in relative prices of goods holding real income constant
Income effect
the movement from one difference curve to another that results from the change in real income caused by a price change
Curves farther from the origin imply…
higher levels of satisfaction than curves closer to the origin
Transitivity
- indifference curves do not intersect one another
- eliminates the possibility consumer is caught in perpetual cycle of indifference
The 4 Properties
- completeness
- more is better
- diminishing marginal rate of substitution
- transitivity
Marginal rate of substitutions final answer has to be
absolute value
Budget Constraint Equation
y= m-px/ py
Slope of the budget line
-px/py
Marginal Utility
derived from last unit of consumption
Optimality Conditions
MRS=px/py
MuX/px= MuY/Py
MUx/MUy= Px/Py
Formula for Substitution Effect
Xo-Xm
Formula for income effect
Xm-X1
Diminishing Marginal Rate of Substitution
as consumer obtains more of good x the amount of good Y they are willing to give up decreases
What can’t indifference curves never do in relation to shape?
Never Can Slope UP!!!!!
How to find income using budget?
PxX + PyY=M
Diminishing Marginal Utility
-the more of something you get the less additional utility you get
What does a change income not effect assume price is held constant?
the slope
Consumer opportunities
represent the possible goods and services consumers can afford to consume
Consumer preferences
determines which of the goods will be consumed
Utility
Ability of a good or service to satisfy one or more needs or wants of a consumer.
Read more: http://www.businessdictionary.com/definition/economic-utility.html#ixzz3ToNCUsRc
How to draw substitution effect?
-draw parallel to new budget constraint
Completeness
a preference or indifference among all bundles
Explain convexity?
…….
Draw Voucher Example
…..
Draw BOGO offer
…….
Draw Quantity Discounts
……..
What is true about all the goods on an indifference curve?
they all provide the same level of satisfaction
total earnings=
fixed payment + wages X hours worked
Corner Solutions
optimum occurs where consumers only buy 1 good
