Chapter 8 Flashcards
Two categories of factors affecting consumer choice
- Consumption possibilities
- Preferences
Assumptions with consumption possibilities
- Two products
- Prices given
- Income given
Budget line
Describes the limits to a consumer’s consumption choices - it show the various combinations of two goods the consumer can afford given his or her income and the prices of the two goods.
Relative price
The money price of one good divided by the price of another good.
= Magnitude of the slope of the budget line.
Opportunity cost of a good x
Quantity of good y that must be forgone to get an additional unit of good x.
Real income
The income expressed as the quantity of goods the household can afford to buy.
Effect of decrease in real income
Shifts the budget line inwards (the consumer can afford smaller quantities)
- Slope is unaffected (relative prices stay the same)
Utitlity
The benefit or satisfaction that a person gets by consuming goods or services
Total utitlity
Total benefit a person gets from the consumption of goods.
Marginal utitily
The change in total utility that results from a unit-increase n the quantity of the good consumed
The principle of diminishing marginal utility.
As the quantity consumed of a good increases, the marginal utility from it decreases.
Maximising Choice
Rational consumers choose the possible combination of goods that give them the highest total utility.
Consumer equilibrium
the situation in which the consumer has allocated all of her available income in the way that maximises her total utility.
Utility-maximising rule:
- Spend all available income
- Equalise the marginal utility per Rand for all goods.
Predictions of Marginal Utility Theory for a rise in income.
When income increases, the demand for a normal good increases.
