chapter 6 Flashcards
utility
satisfaction that a consumer receives from consuming some good or service
total utility
total satisfaction resulting from the consumption of a given commodity by a consumer
marginal utility
the additional satisfaction obtained from consuming one additional unit of a commodity
marginal utility of successive units of a particular product (increases/decreases) over some period of time
decreases
what does a utility-maximizing consumer do?
allocates expenditures so that the marginal utility obtained from the last dollar spent on each product is equal
what is MUx?
marginal utility of product X
what’s the formula for utility maximization?
(MUx/px) = (MUy/py)
why does the demand curve have a negative slope?
when the price falls, the consumer responds by increasing purchases of that product restore that marginal utility
how do you make a market demand curve?
horizontally sum the individual demand curves of the product
substitution effect
reaction of the consumer to the change in relative prices, purchasing power (real income) held constant
income effect
reaction of the consumer to the change in purchasing power (real income) that is caused by the price change, holding relative prices constant
the substitution effect leads the consumer to (increase/decrease) purchases of the product whose relative price has fallen
increase
a fall in one price will lead to an (increase/decrease) in the consumer’s real income, and thus to (increase/decrease) purchases of all normal goods
increase; increase
what is a Giffen good?
when the INCOME effect is strong enough to outweigh the substitution effect
consumer surplus
difference between what consumers would be willing to pay for that unit and what they actually pay
what makes consumer surplus possible?
consumers purchase units of a product until the marginal value equals the market price - on all units before the marginal unit, consumers value the product more than the price
what is the paradox of value?
the price of necessary products remains low despite that its demand remains high (like water)
total value
area under the demand curve
marginal value
placed on one additional unit - given by the product’s market price
what concepts does the paradox of value confuse?
total and marginal value
how to solve the paradox of value?
consider supply; e.g. consumers get more value from a large quantity of water vs they get more value from a small quantity of diamonds; the large supply of water makes it low in price
high total value + low price = large consumer surplus
true or false: price bears a relationship in the total value that consumers place on all of the units consumed of a product
false - price is related to the MARGINAL value
the area under the demand curve and above the price line is….
total consumer surplus
true or false: a Giffen good is an inferior good
true
the demand curve of a Giffen good has a (positive/negative) slope
positive
real income
income expressed in terms of the purchasing power of money income - the quantity of goods and services that can be purchased with the money income
what are the two assumptions of the indifference theory?
- Marginal Rate of Substitution (MRS) is always negative
2. MRS diminishes (slope becomes less steep)
budget lines shows:
combinations of products that are available to the consumer given their money income and prices of the goods that they purchase
opportunity of one good in terms of:
all other goods; measured by the abs val of the slope of the budget line
where is utility maximized on the indifference curve?
where the budget line is tangent to it (marginal rate of substitution equals relative prices of 2 goods)
