Chapter 8 Flashcards
All the things you can afford to buy
consumption possibilities
The choices you make as a buyer of goods and service
Consumption choices
Consumption choices are influenced by two factors:
- Consumption possibilities
- preferences
The boundary between what a household can afford and cannot
budget line
A rise in income will make the following changes to the budget line
shift line outwards
A change in price will make the following changes to the budget line
Slope of line
Satisfaction and benefit a person gets from the consumption of goods.
Utility
Two types of Utility
- Total utility
- Marginal Utility
total benefit a person gets from the consumption of goods.
Total utility
Change in total utility that results from a one-unit increase in quantity of good consumed
Marginal utility
Predictions of marginal utility theory:
- A fall in the price of A
- A rise in the price of B
- A rise in income
Water, essential to life is cheaper than diamonds is an example of:
How to resolve?
- The paradox of value
- The total utility we get from water is enormous while marginal utility diminishes to a small value
- Diamonds opposite
To solve the paradox:
marginal utility per dollar equal for all goods
Anomalies
Choices that do not seem rational
The endowment effect
people tend to assign a higher value to the things they own or possess compared to the value they would place on the same items if they did not own them. In other words, individuals tend to overvalue the items they already have, simply because they possess them.
