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ECON2101 > Consumer Behaviour > Flashcards

Consumer Behaviour Flashcards

1
Q

What assumptions are made about consumer preferences?

A
  • Complete
    • Able to rank all possible bundles/options
  • Transitive
    • Choices are consistent and obey logic
    • A > B, B > C therefore A > C
    • Can never cross
  • Monotonistic/Non-satiation
    • More is better
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2
Q

What is true of MRS?

A

Indifference curves - Diminishing MRS

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3
Q

What special indifference curves are there?

A
  • Useless goods
  • Bad Goods
  • Perfect Substitutes
  • Perfect Complements
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4
Q

∆u =

A

∆u = MUx . ∆X

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5
Q

MRS =

A

MRS = MUx/MUy = Y/X

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6
Q

How does MUx/MUy = Y/X?

A
  • MRS = MUx/MUy
  • MUx = ∂u / ∂x = Y^1/2 1/2X^-1/2
  • MUy = ∂u / ∂y = X^1/2 1/2Y^-1/2
  • MRS = 2Y/2X = Y/X
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7
Q

What are the forms of the budget constraint?

A
  • BC: Px.X + Py.Y = I
  • BC: Y = (I/Py) - (Px/Py) . X
    • Under assumption that all income is spent
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8
Q

What is Y,X max and the slope of the BC?

A
  • Y,Xmax = I/Px,y

- Slope = -Px/Py

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9
Q

What is the U-maximising decision and what is it called?

A
  • -Px/Py = (MRS = MUx/MUy = Y/X)
    • MUx/MUy = Y/X: Willingness to trade between goods
    • -Px/Py: Ability to trade between goods
  • Interior Solution
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10
Q

What does the U-maximising decision imply?

A
  • Eqbm: Px/Py = MUx/MUy : MUy/Py = MUx/Px
  • Px/Py = Y/X: (Px)X = (Py)Y
    • (Px)X = (Py)Y is the ratio of goods at equilibrium
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11
Q

How is the optimal bundle calculated?

A
  • BC: PxX + PyY = I
  • Sub [(Px)X = (Py)Y] (optimal bundle goods ratio) into this and work out X or Y
    • As in (PxX + PxX = I) or (PyY + PyY = I)
  • Plug this into (Px)X = (Py)Y to solve for other good
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12
Q

What are SE and IE for an inferior good if price increase/decreases?

A
  • If price falls, SE: ↑X(↓Y) IE: ↓X(↑Y) TE: ↑X

- If price increases, SE: ↓X(↑Y) IE: ↑X(↓Y) TE: ↓X b/c SE > IE

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13
Q

If SE > IE what does this imply about the goods in question?

A

↑Py → X↑ means substitutes SE > IE

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14
Q

What do food stamps achieve?

A
  • Only buy food - non transferable
  • Effectively, ↓Pfood
  • ↓Pfood → SE → Food↑, AOG↓
  • ↓Pfood → IE → Food↑, AOG↑
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15
Q

How is a cash transfer different from food stamps?

A
  • Relative prices of food and AOG remains constant so no SE
  • Consumer’s choice: better
  • More Efficient
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16
Q

What does the difference between food stamps and cash transfers imply?

A
  • Owing to this, lump sum taxes are more efficient than a tax on a single commodity
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17
Q

What is CV?

A

keep new prices, but ensure that they have the same utility as before policy change

18
Q

What is EV?

A
  • Look at how much the individual would be willing to
    pay so that the policy change does not go through
    • Original price ratio/BC1
    • New level of u (u2)
19
Q

What do substitutes imply about the demand curve?

A
  • Goods that have close/many substitutes will have a large S.E
  • This produces a relatively flat demand curve
20
Q

What do complements imply about the demand curve?

A
  • V.small substation effect - demand is relatively steeper
21
Q

What is true of food/shelter?

A
  • Changes in prices of food/shelter lead to small SE
  • ↑Pshelter → ↓real wealth
  • Because shelter/food make up a large proportion of budget, IE is relatively large
  • Demand curve is flatter than we would otherwise expect
22
Q

What is the difference between the Marshallian and Hicksian demand curves?

A
  • Hicksian is much stepper because only has substation effect
  • A better demand curve, as a constant utility is maintained in the presence of price changes
  • But, we don’t see substitute only, we see the whole picture, therefore needs to be represented
  • Theoretically would prefer Hiskian
  • Using these, we would have a perfect measure of utility change when price changes
23
Q

What is consumer surplus?

A
  • Difference between willingness to pay and market price we pay
  • A good approximate of CV and EV
  • Assume singular market P and consumers are price takers
  • CS = ∑WTP-P
24
Q

What is the worth/value of a good?

A

Expenditure + CS

25
Q

What is PED?

A

= (%∆Q)/(%∆P)

26
Q

What does a good’s PED mean?

A
  • eQP = |1|: Unit elastic
  • eQP > |1|: Elastic
    • QD is more responsive to/than price
27
Q

What are the determinants of PED?

A
  • Substitute availability
    • More available: More elastic
  • Time
    • Longer time: More Elastic
28
Q

What is special about the PED for a linear demand curve?

A
  • PED of demand at any point (P,Q) on a linear curve:
  • eQP = b(P/Q)
    • where b is the slope of the demand curve
  • PED is not constant along a linear demand curve
  • Midpoint of demand curve is unit elastic
  • eQP > |1| for Q than unit midpoint
29
Q

What is total expenditure?

A
  • TE = P * Q
30
Q

What are the components of the relationship between total expenditure and elasticity?

A
  • Price Effect

- Quantity Effect

31
Q

What does PED imply about total expenditure?

A
  • If D is elastic: |eQP| > 1, for a 1%∆P → Qd ∆ > 1%
    • TE = P↑ * Q↓↓
    • Quantity Effect > Price Effect
    • P↑ → TE↓
  • If D is inelastic: |eQP| quantity effect
    • P↑ → TE↑
  • If D is Unit elastic: |eQP| = 1 TE is unchanged
32
Q

What is IED?

A
  • = (%∆Q)/(%∆I)
  • eQ,I > 0: normal good
  • eQ,I > 1: luxury good
33
Q

What is CPE?

A
  • = (%∆Q)/(%∆P’)

- eQ,I > 0: substitute goods

34
Q

What are the demand equation transformations?

A
  • y = a + bx = y-intercept +slope(x) = P
  • Inverse Demand Curve: e.g. P = 50 - 0.5Q
  • Demand Curve: e.g. Q = 100 - 2P
35
Q

What is the MRS of perfect subs?

A

a/b I.E MUx/MUy DUH!

36
Q

What is true of a price change where x is an inferior good?

A

All outcomes the same except the income effect for X is opposite, but since SE > IE this doesn’t affect TE.

However, (for P(x) increase) the diagram must show A to B (SE) moving as a decrease in X and B to C (IE) as an INCREASE in X, with Y increasing as normal.

i.e. the A to B needs to be massive and the B to C needs to be tiny (I curve needs to be EXTREMELY flat)

37
Q

How can preferred consumption be determined solely from a utility function and prices?

A

MUx/Px vs MUy/Py

38
Q

Y/X is the MRS OF….

A

x for y

39
Q

sqr(xy) =

A

x^(1/2) y^(1/2)

40
Q

If a question asks how many of one good are needed to compensate for another….

A

MRS!

41
Q

How do we determine wether someone is optimising?

A
  1. MRS (Y/X) Px/Py

2. MUx/Px MUy/Py

42
Q

What is point PED?

A

b(P/Q)

ECON2101 (11 decks)

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