Chapter 7 Flashcards

1
Q

Law of Diminishing Marginal Utility

A

added satisfaction declines as a consumer purchases additional units of a given product

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2
Q

Utility

A

want satisfying power, happiness and satisfaction obtained from consuming goods and services.

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3
Q

points about Utility (3)

A
  • not closely related with usefullness
  • subjective to consumers
  • difficult to quantify
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4
Q

Total Utility

A

total amount or satisfaction, pleasure person derives from consuming specific quantity of good

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5
Q

marginal utility

A

extra satisfaction from one more additional unit of

good

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6
Q

describe the graph of total utility

A

tends to increase at a decreasing rate hit a maximum then decrease

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7
Q

describe the graph of marginal utility

A

graph tends to decrease

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8
Q

what if price falls relate with marginal utility per price as well

A

consumers tend to buy more units if price falls as marginal utility per price increases

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9
Q

theory of consumer choice (4)

A

rational behaviour
preference
budget constraints
prices

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10
Q

rational behaviour

A

decision and purchases purposeful

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11
Q

preference

A

consumers have different and specific preferences of goods and services

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12
Q

budget constraints

A

consumers have fixed income

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13
Q

prices (2)

A

price change results behaviour change

goods are scarce relative for demand to them so good carries price tag

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14
Q

Utility Maximizing Rule

A

to maximize satisfaction, consumers should allocate their money income so that the last dollar spent on each product yields the same amount of marginal utility per price

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15
Q

Utility maximizing equation

A

Mu of A/price of A = Mu of B/price of B

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16
Q

consumer equilibrium

A

consumers has no incentive to alter expenditure

pattern

17
Q

when looking at utility maximizing chart what do we do

A

buy unit where MU/$ is highest and move money away from good where MU/$ is low

18
Q

Income Effect

A

change products price effect on consumer quantity demanded and purchasing power ex price decrease, income no change but purchasing power increases.

19
Q

substitution effect

A

impact that a change in products price has on relative expensiveness and on quantity demanded of another good, move from expensive good to cheaper good.

20
Q

Applications of MU/P Ipads

A

increase in features and marketing resulted in higher MU/P

21
Q

Diamond-Water paradox

A

utility of water is high price is low, diamond utility is low and price high we only care about MU/$. one drop of water doesn’t increase MU but one more diamond does increase mu. “diamonds more valuable”

22
Q

Opportunity Cost and Value of Time

A

time is a valuable economic variable

time can be used to earn money

23
Q

cash and non cash gifts

A

consumer cash gifts preferred because non cash gifts may not match preference of consumer so total utility not maximized

24
Q

Indifference Curve

A

Combination of A and B that gives the same utility. Consumer don’t care which combination but want to be on highest indifference curve but constrained by income

25
Q

Effect of price decrease normal good (3)

A

Sub Effect: positive
Inc Effect: positive
Total Effect: positive

26
Q

effect of price decrease inferior good (3)

A

sub effect: positive
income effect: negative
total effect: postive