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Economics - Micro > Consumer behaviour > Flashcards

Consumer behaviour Flashcards

1
Q

Sum up the consumer demand theory in four points.

A
  1. ) We assume that rational consumers seek to maximise utility given scarce resources
  2. ) Utility is based on exogenous prefernces
  3. ) Resources are represented by a budget constrain which is determined by a combination of exogenous prices and income
  4. ) The demand of individuals is endogenous given prices
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2
Q

What are four assumptions we make about a consumers preference?

A
  1. ) Completeness and rankability
  2. ) Monotonicity
  3. ) Transitivity
  4. ) The more a consumer has of a particular good, the less she is willing to give up of something else to get even more of that good
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3
Q

Define consumption bundle.

A

A set of goods or services a consumer considers purchasng

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4
Q

What does the assumption completeness and rank ability imply?

A

Consumers can compare bundles of goods and choose the one they prefer

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5
Q

What does the assumption of monotonicity imply?

A

For most goods, more is at least as beneficial as the current consumption

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6
Q

What does the assumption transitivity imply?

A

Consumers rankings of goods are consistent. If they prefer A to B and also B to C, then she will prefer A to C

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7
Q

What does the assumption the more a consumer has of a particular good, the less she is willing to give up of something else to get even more of that good imply?

A

Consumers like variety

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8
Q

Define utility.

A

Utility is a measure of how satisfied a customer is

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9
Q

Define utility function.

A

A utility function is a mathematical function that describes the relationship between what consumers actually consumer and their level of well-being

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10
Q

Define marginal utility.

A

Marginal utility is the additional utility a consumer receives from an additional unit of a good or service

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11
Q

What can we derive from utility?

A

Indifference

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12
Q

Define indifferent.

A

The special case in which a consumer derives the same utility level from each of two or more consumption bundles

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13
Q

What are the two types of ranking of consumption bundles?

A

Ordinal and cardinal rankings

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14
Q

What is the difference between ordinal and cardinal rankings?

A

Ordinal is where you can line them up from best to worst, where as cardinal can tell you exactly how much better good is from another

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15
Q

What three things does Marshallian cardinal utility assume?

A
  1. ) The cardinal measurement of utility is called utils
  2. ) Diminishing marginal utility of consumption
  3. ) A constant marginal utility of money income
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16
Q

What does the Marshallian cardinal utility state?

A

Rational individuals choose their quantity demanded in order to maximise their level of utility, subject to constraints imposed by their income and price levels

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17
Q

What is the optimal condition for marshalling cardinal utility?

A

The gain from consumption = The loss from the price of the consumption, marginal benefit of the consumption = marginal cost

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18
Q

Define the indifference curve.

A

A mathematical representation of the combination of all the different consumption bundles that provide a consumer with the same utility

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19
Q

What are four assumptions of the indifference curve?

A
  1. ) Ordinal measurement of utility
  2. ) No unit of utility measurements
  3. ) Rational individuals choose their quantity demanded to maximise their utility subject to any constraints
  4. ) There is a budget constrain
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20
Q

Why can we always draw indifference curves?

A

Assumption of completeness and rankability,

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21
Q

Why can you look at different indifference curves and say which have higher utility levels?

A

The monotonicity assumption meaning you just choose the curve furthest to the right

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22
Q

Why do indifference curves slope downwards?

A

If the curve did slope up, this would mean that a consumer would be indifferent between a particular bundle and another nudge with more of both goods, can’t be true because of the monotonicity assumption

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23
Q

Why can indifference curves never cross?

A

The transitivity assumption, if they intersect it implies that the same bundle offers two different utility levels, which can’t be the case

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24
Q

What are three assumptions of the budget constraint line?

A
  1. ) Each good has a fixed price
  2. ) The consumer has a fixed income available to spend
  3. ) The consumer can’t borrow or save and so will spend the entire income on the two goods
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25
Q

What model do we use to incorporate prices and consumer income?

A

Budget constraint model

26
Q

Define budget constraint.

A

A curve that describes the entire set of consumption bundles a consumer can purchase when spending all income

27
Q

What is the equation for the budget constraint (Income =) ?

A

Income = PxQx + PyQy

28
Q

Define a feasible bundle.

A

A bundle that the consumer has the ability to purchase lies on or below the consumers budget constraint line

29
Q

Define an infeasible bundle.

A

A bundle that the consumer cannot afford to purchase, lies to the right and above a consumers budget constraint line

30
Q

What do you have to rearrange the budget constraint equation to to plot it?

A

Qx

31
Q

What is the slope of the budget constraint line?

A

-Px/Py

32
Q

What changes the slope of the budget constraint line?

A

Changes in the relative prices, is the price of good x doubles the slope will be twice as steep where as if the price of good Y doubles the slope will be half as steep

33
Q

If the budget line changes slope or shifts what happens to the number of feasible bundles.

A

If any part moves towards the left then there will loss of feasible bundles

34
Q

What causes a shift int he budget constraint line?

A

A decrease in income because then you can buy less of both of the goods

35
Q

What happens if the income and prices go up proportionally?

A

There is no change to the budget constraint line

36
Q

What are three reasons you get kinks in the budget constraint line?

A
  1. ) Quantity discounts
  2. ) Quantity limits
  3. ) Non-linear prices
37
Q

Draw the a budget constraint line.

A

Picture

38
Q

Draw a kinked budget constrain line.

A

Picture

39
Q

How do quantity discounts effect the budget constrain line?

A

The slope will become steeper at the end which the cheaper good

40
Q

Is being on a higher or lower indifference better?

A

Higher

41
Q

What is the slope of the indifference curve called?

A

The marginal rate of substitution

42
Q

Draw an indifference curve.

A

Picture

43
Q

Define marginal rate of substitution.

A

The rate at which a consumer is willing to trade off one good X for another food Y and still be left equally well off

44
Q

Whats the equation for marginal rate substitution?

A

MRS = -∆Y/∆X

45
Q

Why is marginal rate of substitution usually positive even though the equation has a minus sign?

A

Because the slope is usually negative so they will cancel out

46
Q

How do we move along an indifference curve and what remains the same when we do so?

A

Change out consumption, utility remains the same

47
Q

What is marginal rate of substitution the inverse off?

A

The inverse ration of the marginal utilities we get from each good

48
Q

What is the equation for marginal rate substitution relating marginal utilities?

A

MRS = MUx/MUy

49
Q

What does it mean if the indifference curve is steep?

A

The consumer is willing to give up a lot of good Y to get a small additional amount of good X

50
Q

What do we add to the indifference curve to find the optimal point?

A

The budget constrain line

51
Q

Where is the optimal choice point in the indifference curve?

A

Where the budget constrain is tangent to the indifference curve. The mix of good X and good Y that will be consumed given the consumer income and relative prices of the goods

52
Q

What does the curvature of the indifference curve show us?

A

The straighter the curve the better the substitute good, complementary goods will have more curvature

53
Q

Why do complementary goods have more curvy indifference curves?

A

Means the goods are complementary, so if you have a lot of good X and not many of good Y, you want want to readily substitute Y for X, however as the quantities even out you don’t mind as much

54
Q

Define perfect substitutes.

A

A good that a consumer can trade for another good, in fixed units, and receive the same level of utility

55
Q

Define perfect complements

A

A good from which the consumer receives utility dependent on it being used in a fixed proportion with another good.

56
Q

What does the indifference curve look like for perfect substitutes?

A

Straight line with a negative slope

57
Q

What does the indifference curve look like for perfect complements?

A

L shaped

58
Q

How do we find the optimal choice point?

A

Set the gradient of the of the budget constraint line and the indifference curve equal

59
Q

What is the equation for finding the optimal choice point ?

A

MRS = MUx/MUy = Px/Py

60
Q

What does the indifference curve look like for two goods you don’t like?

A

Concave curve

Economics - Micro (12 decks)

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