Chapter 5: Demand and Consumer Behaviour Flashcards
On what fundamental premise does economics rely on?
Economics relies on the fundamental premise that people tend to choose those goods and services they value most highly.
What does “Marginal” mean in economics?
Marginal means an additional unit in economics
Marginal utility:
Marginal utility denotes the additional utility arising from the consumption of an additional unit of a commodity.
What does the law of diminishing marginal utility state?
The law of diminishing marginal utility states that, as the amount of a good consumed increases, the marginal utility of that good tends to diminish.
Equimarginal principle:
The law of diminishing marginal utility states that, as the amount of a good consumed increases, the marginal utility of that good tends to diminish.
Substitution effect:
When the price of a good rises, consumers will start to look to alternatives in order satisfy their needs more inexpensily.
Income effect:
The change in the quantity demanded that arises because a price change lowers consumer real incomes.
High income elasticities:
Demand for goods rises rapidly as income increases.
Low income elasticities:
Weak response of demand as income rises.
Substitute goods:
Goods are substitutes if an increase in the price of one increases the demand for the other.
Complementary goods:
Goods are complements if an increase in the price of one decreases the demand for the other
Independent goods:
Goods are independent if a price change for one has no effect on the demand for the other.
Demerit goods:
In economics, a demerit good is “a good or service whose consumption is considered unhealthy, degrading, or otherwise socially undesirable due to the perceived negative effects on the consumers themselves”
ex: passive smoking and increased healthcare costs for all
Social cost:
private cost + external cost
What is a conspicuous characteristic of demerit goods that cause addiction?
Demand for highly addictive goods is likely to be quite price-inelastic.
The paradox value:
The more there is of a commodity, the less is the relative desirability of its last little unit.
Consumer surplus:
Consumer´s gain from an exchange
Indifference curve:
An indifference curve shows combinations of goods and services between which a consumer is indifferent.
Law of Substitution:
The substitution effect refers to the change in demand for a good as a result of a change in the relative price of the good compared to that of other substitute goods. For example, when the price of a good rises, it becomes more expensive relative to other goods in the market.
Consumer´s equilibrium:
Consumer’s Equilibrium means a state of maximum satisfaction. A situation where a consumer spends his given income purchasing one or more commodities so that he gets maximum satisfaction and has no urge to change this level of consumption, given the prices of commodities, is known as the consumer’s equilibrium.
