consumer behaviour Flashcards
what do consumers aim to maximise?
we assume that rational consumers seek to maximise utility given scarce resources
is utility based on endogenous or exogenous preferenceS?
exogenous preferences
what are budget constraints?
Resources are represented by a budget constraint which is determined by a combination of exogenous prices and income.
what are the assumptions about preferences?
completeness - consumers can compare bundles of goods and rank them ie prefer/indifferent
transitivity - consumers rankings of goods are consistent. if a is preferred to b and b is preferred to c then a is preferred to c
monotonicity - in general, more of something is better (more of something we dislike will be worse)
what is the effect of diminishing marginal utility of utility curves?
it gives us convexity on the utility curves
what is the effect of continutity on utility curves?
there are no sudden jumps in utility and thus it is representable by a utility function
what is utility?
utility is a measure of how satisified consumers are
what is a utility function?
a utility function describes the relationship between what consumers consume and their well being. they can be plotted on graphs
what is ordinal ranking?
bundles can be ranked from best to worse eg pizza is preferred to economics lectures
what is cardinal ranking?
this allows a person to say exactly how much better one bundle is compared to another- pizza is 10 times more enjoyable than economics lectures
what are the assumptions of marshallian cardinal utility?
the cardinal measurement of utiltiy is called Utils
diminshing marginal utility of consumption
a constant marginal utility of money
what is the optimality condition for marshallian cardinal utility?
when the utility gained from the consumption measured in utils is equal to the loss of price measured in the marginal utility of income
what are the assumptions for indifferent curve anaylsis?
ordinal measurement of utility
there is no unit of utility measurement
rational individuals choose their quantity demanded to maximise their utility subject to any constraints
there is a budget constraint
there are indifference curves that are derived from utility functions
assuming we spend all of the income what is the formula of the indifference curve?
Qy = (income - PxQx)/Py
what is the slope of an indifference curve assuming all income is spent?
- (Px/Py) is the slope
what does the slope of the budget constraint represent?
the slope of the budget constraint represents the opportunity cost of two goods
what occurs to the budget constraint as incomes rise?
the budget constraint is shifted outwards
what occurs to the budget constraint if the price of good X falls?
the budget constraint is stretched so that it touches the good X axis at a larger quantity
when would a kinked budget constraint appear?
it will appear when there are:
limits to the quantity of a good available
non linear pricing
quantity discounts
when is a consumer indifferent between two bundles of goods?
a consumer is indifferent between two bundles of goods if they get the same utility from the two bund;es
what is an indifference curve?
An indifference curve plots out all of the bundles that provide a consumer with the same utility.
what is prefferable being on a lower indifference curve or on a higher indifference curve?
a higher indifference curve as it is assumed that more goods is better and that the goods are desireable. however there will eventually reach a point due to diminishing returns where we do not want to consume any more. this is the point of satisfaction.
twhat is the point of satisfaction?
the point where we do not wish to consume any more of either good
what is the slope of the indifference curve called?
it is called the marginal rate of substitution of X for Y (MRSxy). this is what consumers will trade one unit of good X for in exchange for units of good Y
what is the formula for the marginal rate of substitution of good X for Y?
- change in Y/ change in X
what is the change in utility moving from one place on the indifference curve to the other?
the change in utility is equal to zero
how can you find the optimal point of consumption using an indifference curve and the budget constraint?
the optimal consumption is the point where the budget constraint and the indifference curve touch
what is the formula at the point of tangency>
the slope of the indifference curve is equal to the slope of the budget constraint at the point of tangency therefore
MUx/MUy = Px/Py
if the slope of the indiffernce curve is negative what does this mean>
there are two goods or two economic bads
if the slope of the indiffernce curve is postive what does this mean?
there is one good and a bad
what does the steepness of the indifference curve tell you?
the steeper curves show the consumer is willing to give up a lot of one good for a little of the other good
what is the optimal consumption of two economic bads?
the optimal consumption of two economic bads is zero so at the origin
what does the curvature of the indifference curve tell you ?
the more convex to the orign the curves are, the more complementary good X and good Y are
if the curve is a perfect subsitute what does the curve look like?
the curve is a straight diagnol line with a negative gradient
what is the formula for a utility function of a perfect substitute?
U = aX + bY where a and b are the marginal utilities of good X and Y respectively
what are perfect complements?
they are goods that must be consumed together
what is the formula for the utility function of a perfect substitute?
U = min {aX, bY} where a and b are the marginal utilities of good X and Y respectively
