Chapter 6: The Consumer Behavior Flashcards
Utility
denotes satisfaction, a subjective pleasure that an individual can derive from consuming a good or service. In economics, it explains how individuals divide their limited resources among the commodities that provide them satisfaction.
Tastes/Preferences and Income
The factors that make an individual decide what bundle of goods to consume.
Economic theory of consumers
The consumer prefers the best bundle of goods that he or she can afford
Cardinal Ranking of Preferences and Ordinal Ranking of Preferences
Two ways of measuring utility
Cardinal Ranking of Preferences
attaches a specific number to different levels of satisfaction
Ordinal Ranking of Preferences
Rank or ordering preferences
Tastes and Preferences
Subjective in Nature
Taste and Preferences
Means that an individual has a distinctive way of choosing what is best for him in gaining satisfaction.
The Law of Diminishing Marginal Utility
States that each successive incremental improvement in health generates less and less additions to total utility.
The Law of Diminishing Marginal Utility
Means that as more goods are consumed, the extra satisfaction or marginal utility received decreases.
Utils
Refers to a measurement of utility
Saturation Point
Point where utility starts to decrease or diminish
The Consumer’s Equilibrium
If total utility is maximized with regard to ones income, it means that they are in ______
The Consumer’s Equilibrium
Spending the last peso of his income on two goods until the total utility or satisfaction derived in consuming both goods is the same.
Completeness
Non-Satiation
Transitivity
The three assumptions of rational preferences
Completeness
Bundle of goods can be ranked as Preferred, indifferent, or less preferred
Non-Satiation
More is better
Transitivity
If A is greater than B, but B is greater than C. Therefore, A is greater than C.
Indifference Curve
a curve which shows the different combinations of Good X and Good Y which yield the SAME LEVEL OF UTILITY
Indifference Curves are:
Negatively Sloped
Convex to the Origin
Do not Intersect
Three Characteristics of the Indifference Curve
Marginal Rate of Substitution (MRSxy)
The amount of Good Y that a consumer is willing to give up in exchange for Good X and still lie on teh same indiference curve.
MRS
Slope of the Indifference Curve is also known as
Marginal Rate of Substitution (MRS)
This is the cause for the negatively sloped indifference curve.
Diminishing Marginal Rate of Substitution
This causes Indifference Curves to be convex with the origin
Violates the transitivity Principle
This causes Indifference Curves not to intersect
MRSxy = ∆Qy/∆Qx
Formula for Marginal Rate of Substitution
Budget Line
Shows the different combinations of Good X and Good Y that a consumer can purchase given his income and the prices of goods.
Consumer’s Equilibrium
When the tangency of the budget line and the indifference curve is achieved.
Income Consumption Curve
Engel Curve
By varying the income of the consumer and holding the tastes and prices of Good X and Good Y, we can obtain the _____ and the ______
Income Consumption Curve
Defined as a collection of points of consumer equilibrium resulting from varying income.
Engel Curve
Shows the amount of a commodity that the consumer would buy per unit of time at different levels of income.
Price Consumption Curve
Collection of points of consumer’s equilibrium resulting from varying the price of Good Y.
