Chapter 6 Flashcards
a. Utility theory is based on the hypothesis that the ?????
received from each additional unit of the good ?????
as total consumption of the good increases.
utility, decreases
Whats marginal utility ?
This means that a smart shopper will spend their money in a way that gets them the most happiness (utility) for every dollar they spend, across all the things they buy.
How can marginal utility be negative ?
When marginal utility is negative, consuming extra makes you feel worse, like eating a fifth slice of pizza when you’re already full—it might make you uncomfortable or sick.
Marginal utility analysis tells us that a rise in the price of a good, ceteris paribus, leads each consumer to reduce the
???? of the good. This, in turn, predicts a ???? demand curve.
Quantity demanded, negatively sloped
How do you calculate if Marginal utility is the same ?
Marginal utility / Price
How do you calculate marginal utility ?
numéro d’aprés - numéro d’Avant = MU
good A and good B (substitutes). What would be the likely impact of a decrease in the price of good B
Since they’re subs, the consumer will buy more of good B and less of A
Substitution Effect
When the price of a good changes, it becomes cheaper or more expensive compared to other goods.
People buy more of the cheaper good and less of the relatively expensive good, even though their overall buying power (real income) hasn’t changed.
Income effect
When prices change, it affects how much you can afford overall (your real income).
If prices drop, you feel richer and might buy more of everything. If prices rise, you feel poorer and buy less of everything.
Effects on a normal good if price goes up :
Sub effect : Because sub is cheaper, you switch to it. YOu buy less of expensive.
Income effect : Higher price means you feel poorer. Normal goods means you buy more when you have more money so you buy less. Both effect lead to buying less.
Effects on an inferior good if price goes up :
Sub effect : becomes more expensive so you will switch to other good and buys less or switch.
Income effect : Higher price means you feel poorer. Since inferior good you buy more when you feel poorer, You will buy more of the good. They work in opposite directions.
substitution effect and the income effect work in the same direction to produce a downward-sloping demand curve?
Any normal good,
substitution effect and the income effect work in the opposite effect.
A giffen good, any inferior good. If the income effect is stronger, the curve is upward sloping.
Income effect and sub effect goes to where to where
Sub effect : q0 to q*
Income effet : q* to q0
Total consumer surplus is the area ???? the demand curve and
???? the price line. Consumer surplus on any one unit is the difference between the maximum price the consumer is willing to pay for that unit and the ????
.
below, aboe, price that is actually paid
