Consumer Behavior Flashcards
Define utility
It is the level of satisfaction that a consumer gets from the consumption of a good or service
State two types of utility measurement
Ordinal utility and Cardinal utility
Define Cardinal utility
It is the measurement of utility based on the idea of a consumer quantifying the utility he derives from consuming a particular product
Define total utility
It is the overall satisfaction that an individual gets from the consumption of all units of a product over a given period of time
Define marginal utility
It is the additional satisfaction derived from the consumption of one more unit of a product
Define the law of diminishing marginal utility
Ceteris paribus,, as more and more units of a commodity are consumed , the additional utility derived of each successive unit will fall or decrease
Define ordinal utility
It is measuring utility based on the idea of preference ranking
What is an indifference curve
It is a diagram that illustrates the combination of two goods that yield the same level of satisfaction to the consumer
Define a budget line
It is a diagram that illustrates a combination of two goods that can be purchased within a given level of income
What causes a shift in the budget line
An increase or decrease in the level of consumer income and changes in the price of the commodity itself
State the usefulness of the indifference curve
> to demonstrate the logic of rational consumer behavior
Derivation of individuals demand curves
Income and substitution effects of price change
PPC and icc
Define Consumer equilibrium
It is the consumption bundle where total utility is at maximum
Define marginal rate of substitution
In a two product context , it suggests that a consumer is willing to sacrifice less of one product to get more of another product , leaving utility unchanged
What is the income consumption curve
It shows how quantity consumed of two goods changes as income changes, assuming no change in relative prices
What is the substitution effect
It is the additional amount of a product purchased as a result of it’s price being cheaper relative to other substitutes in consumption
Define the income effect
The additional purchasing power resulting from a fall of one or more products in the consumption bundle
State how MU is calculated
Change in total utility divided by change in quantity
