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Economics > Consumer Behavior > Flashcards

Consumer Behavior Flashcards

1
Q

What is an indifference curve?

A

A curve that shows consumption bundles that give the consumer the same level of satisfaction (i.e. combinations of pizza and Pepsi with which the consumer is equally satisfied.)

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2
Q

What are the four properties of an indifference curve?

A

(1) Higher indifference curves are preferred to lower ones. People usually prefer to consume more goods rather than less. (2) Indifference curves are downward sloping. The slope of an indifference curve reflects the rate at which the consumer is willing to substitute one good for the other. (3) Indifference curves do not cross. (4) Indifference curves are bowed inward. The slope of an indifference curve is the marginal rate of substitution—the rate at which the consumer is willing to trade off one good for the other.

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3
Q

Explain marginal rate of substitution.

A

The rate at which the consumer is willing to trade off one good for the other (i.e. how much Pepsi the consumer requires to be compensated for a one-unit reduction in pizza consumption)

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4
Q

What is a budget constraint?

A

The consumption bundles that the consumer can afford.

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5
Q

How might a budget constraint be impacted by an increase in income?

A

Additional bundles could be consumed with an increase in income.

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6
Q

What two graphical elements are needed in order to determine a consumer’s optimal point of consumption?

A

Indifference curve and budget constraint.

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7
Q

How is a consumer’s optimal point of consumption determined precisely? What is the condition that must be met?

A

The point at which this indifference curve and the budget constraint touch (the best combination of pizza and Pepsi available to the consumer.) The marginal rate of substitution equals the relative price of the two goods.

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8
Q

Total

A

Sum

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9
Q

Average

A

Mean

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10
Q

Marginal

A

Change in a total/ change in number of units

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11
Q

Utility

A

A measure of happiness

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12
Q

Utility maximization

A

The idea that we all make choices that make ourselves the happiest we can be

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13
Q

Constrained utility maximization

A

Ex. My budget constrains me from having what makes me happiest

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14
Q

Utility maximization preference

A

These are what I prefer

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15
Q

Utility function

A

An equation that tells me how much your happiness goes up or down when you make different decisions or different things happen to you.

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16
Q

Decreasing marginal utility

A

As I consume more of something, the ADDED utility gets smaller.

17
Q

How much of a good will you consume?

A

Until the marginal (added ) benefit on the next unit you consume equals the marginal cost (the price)

18
Q

Budget line

A

The line shows the maximum I can afford

The slope is the ratio of the prices (price of good x/ price of good y)

19
Q

Indifference curve

A

A line which shows all the combinations of a good which make you equally happy

The slop is the marginal rate of substitution

20
Q

What are the 4 properties of indifference curves

A
  • higher indifference curves are preferred to lower one’s
  • indifference curves are downward sloping
  • indifference curves do not cross
  • indifference curves are bowed inward
21
Q

Why does an indifference curve have a bowed shape

A

It ensures that people consume a mix of goods

22
Q

Marginal rate of substitution

A

The rate of exchange between two goods which keeps a consumer on the same indifference curve

23
Q

Optimum consumption bundle

A

Where the budget constraint and the indifference curve meet

24
Q

What are the conditions for optimal it’s precisely

A

Marginal rate of substitution = price of good x/ price of good y

25
Q

How does a change in income affect budget constraint

A

Keeps the same slope because price has not changed, but shifts the whole budget constraint outward

26
Q

What does a change in the price of one of the goods do to the Budget constraint

A

It changes the slope, because the slope is a ratio of the prices

27
Q

The substitution effect

A

The change in consumption that results when a price change moves the consumer slog a given indifference curve to a point with a new marginal rate of substitution

28
Q

The income effect

A

The change in consumption that results when a price change moves the consumer to a higher or lower indifference curve

29
Q

What is a demand curve

A

Shows the relationship between the quantity demanded and the price

It represents the willingness to pay for a good

It shows the marginal benefit to the consumer of consuming the good.

30
Q

What is the law of demand

A

As price increases, quantity demanded falls

-This is why the demand curve is ALWAYS downward sloping

Economics (11 decks)

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