chapter 6 Flashcards
1
Q
typical consumer
A
- exhibits rational behaviour
- knows preferences
- is subject to budget constraint
- responds to price changes
2
Q
utility
A
- satisfaction a person gets from consuming a good or service
3
Q
maximization
A
- consumers seek to maximize total utility subject to constraints (income and market price)
4
Q
total utility
A
- total satisfaction
5
Q
marginal utility
A
extra satisfaction from consuming one more unit
6
Q
util
A
unit of pleasure or utility obtained from an item
7
Q
2 item utility
A
- marginal utility received from 2 products is independent of the quantity of the other product
- buy more of good with higher utility, as more of this product is bought the marginal utility diminishes until it equals that of the other product
8
Q
substitution effect
A
- when the price of one good falls there is a substitution to that product
9
Q
income effect
A
increase in real income increases the consumption of both products
10
Q
market demand curves
A
- market demand is sum of individual demands
11
Q
giffen goods
A
- good must be inferior - reduction in income leads to households to produce more
- goo must take a large proportion of household expenditure
- ex. bread price increase - in order to survive increased consumption of bread bc it was the only thing they still afford
12
Q
conspicuous consumption good
A
- products consumed for their snob appeal
- may violate theory of maximization bc snobs would still buy at a lower price as long as people thought they paid a lot
- this means that its unlikely that market is positively sloped
- lower income consumers could buy inexpensive diamonds
- behaviour would offset snobs
13
Q
prospect theory
A
- people are loss averse
- people experience diminishing MU for gains and diminishing disutility for losses
- people judge relative to status quo
