Chapter 6 - Consumer behaviour Flashcards
What motivates consumer
maximizing their utility
Utility def
Total satisfaction deriving from the goods and services consumed
Total utility def
Full satisfaction from the consumption of a product by a consumer
Marginal utility def
Additional satisfaction resulting from consuming one more unit of a product
Utility vs qt bought (consumed)
Utility of successive units of a product decreases as total consumption increases. MU falls as the level of consumption rises
shape of the utility ressembles which curve
shape of the demand curve
it terms of calculus, what is the marginal utility
slope of the total utility function
Theory of consumber behavior : individual demand shape and market demand shape
both negatively sloped
how consumers can maximize their utility
make sur that utility obtained from last dollar spent on each product is the same
2 ways of writing formula for maximal utility. What second one means
MUx/Px = MUy/Py or MUx/MUy = Px/Py
2 effects of a change in price
alters relative prices and changes consumer’s real income
What is the substitution effect
effect that increases qt demanded of a good if relative price fell and reduces relative price of good if price increased
What is the income effect
price changed = my income changed
for a normal good, effect that leads consumers to buy more in price has fallen
for an inferior good, effect that leads consumers to buy less if price has fallen
Size of income effect what it depends on (2)
1) Amount of income spent on price changing product
2) How much price changed
Overall effect of price change on demand curve
Combination of substitution effect and income effect
what substitution effects tends to do on demand curve
increase qt demanded
what income effect tends to do on demand curve
increase qt demanded for a normal good. Decrease qt demanded for an inferior good
Normal good demand curve
Subs effect and income effect work in the same direction
Normal good demand curve : which is more important subs effect of income effect and why
Substitution effect. Income effect is small because the increase in purchasing power coming from income effect is low
Inferior good demand curve
Subs effect and income effect work in opposite directions but subs > income effect. steeper demand curve
Giffen good
Inferior good for which the demand curve is + sloped. income effect > subs effect
What is to remember about demand curves for normal, inferior and inferior Giffen good
Individual demand curves
Goods consumed for their snob appeal and status they confer -> why they do not violate theory of utility maximization ?
1) Consumers will buy more if price drops (as long as people think they paid the high price)
2) Very unlikely that the demand curve is positively sloped
On an individual demand curve, what is the surplus for a unit of product bought
for the q unit, the surplus is the price associated minus the price at which it’s going to be bought
Utility vs surplus
Sum of prices we were willing to pay for each product q = utility. Sum of (prices we were willing to pay for each product q - price at which products were bought)
In general, what is the MU on the individual demand curve
Price of last unit bought (shows the value we give to this unit)
Value and utility
Synonyms (kind of)
2 ways of determining value placed by a consumer on total consumption of some product
1) Sum of valuations placed on each unit
2) How much consumer would pay if he was to buy all these units if alternative is none
What is the paradox of value
You can have invaluable goods at low prices (ex . water) and unneccesary goods at high prices (ex. diamonds)
Solution to paradox of value
Supply has to be taken into account -> will determine eq price
What is the MU (or marginal value) associated with on the demand curve of an individual
Product price
Consumer surplus and MU for water
Low MU because low price but valued highly so high consumer surplus
Consumer surplus and MU for diamond
High MU because high price but not too much value (it’s necessary) so low consumer surplus
