consumer behaviour and demand Flashcards
what is marginal utility
the increase in utility when consumption of a
good increases by one unit.
what is diminishing marginal utility:
tendency for marginal utility to decrease as the consumption of a good increases—additional units of a good will be more valued when the consumer is not already consuming much of that good.
describe how utility can be used to rank alternative consumption combinations
For each combination of goods, there is a numerical value of utility. Combinations of goods with a higher utility are preferred to combinations of goods with a lower utility.
is it possible to compare utility levels?
no, cannot say that one person’s utility is higher or lower than another person’s utility. **Utility is an indicator of one individual’s preferences. **
consumers want to
to maximize utility—to make a purposeful choice that provides the most satisfaction using scarce resources.
describe a constraint to utility maximisation
budget constraint tells us that total expenditures on all goods and services must be less than a certain amount
what is utility maximisation?
Utility maximization means that people choose the highest possible level of utility given their budget constraint.
what is the income and substitution effect?
Income effect: the amount by which the quantity demanded falls because of the decline in real income from a price increase (even though her actual income has not decreased )
_substitution effect _which quantity demanded falls when the relative price rises (relatively more expensive than other goods whose prices do not change), exclusive of the income effect.
what is marginal benefit
the increase in the benefit from, or the willingness to pay for, one more unit of a good.
describe price and its relation with marginal benefit
When the price of a good exceeds the marginal benefit of the first unit of a good, consumers will not demand any of that good.
As the price falls, consumers will demand more and more units of the good as the price of each additional unit **becomes equal to the marginal benefit of that unit. **
price equals
marginal benefit
what is consumer surplus?
is the difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually do pay (i.e. the market price)
i.e. the difference between what a person is willing to pay for an additional unit of a good—the marginal benefit—and the market price of the good
consumer surplus measures
how much they were willing to pay above and beyond the price to acquire the good
Consumer surplus is the area between the individual demand curve and the market price line.
describe consumer surplus and its relation with price
when there is a lower price, those who had a high willingness to pay will now derive even more consumer surplus
calculate consumer surplus
show consumer surplus
example of budget constraint
what can the consumer afford?
example of budget constraint
what does the slope of budget constraint show?
income change leads to
parallel shift of budget constraint - no change in slope
show budget constraint
of income at $100/w
Income at $200/w
what is the total benefit?
substitution effect
how to calculate utility per dollar?
For 2 movies 6 pizzas bundle
given movie is 10 and pizza is 5
what is the best affordable bundle?
best affrodable bundle is 2 movies, 6 pizzas
at C, MU(2nd movie) = 38
MU(6th pizza) = 19
utility is maximised when
given that MU second movie = 38
Movie = 20
MU 6th pizza = 19
Pizza =5
can no longer afford at the new, higher price of movies
difference between market demand and market supply
