Consumer Choice Theory Flashcards
What are consumption choices?
The choices you make as a buyer of goods and services are influenced by many factors e.g consumption possibilities and preferences
What are consumption possibilities?
- All the things you can afford to buy
- Different combinations of goods and services
What are consumption possibilities limited by?
All limited by income and prices. Spending all your income = reaching the limits of consumption possibilities
How do consumption possibilities relate to the budget line?
Reaching limit of consumption possibilities = budget line - the boundary between those you can afford and those you cannot
What happens when there are changes in consumption possibilities?
When income or prices change, rise in income shifts budget line outward but leaves slope unchanged, change in price affects the slope of the line.
What is the concept of utility?
The benefit or satisfaction that a person gets from the consumption of goods and services
What is total utility?
The total benefit a person gets from the consumption of all the different goods and services. It depends on the level of consumption, more consumption raises utility.
What is marginal utility?
The change in total utility that results from a one unit increase in the quantity of the good consumed. Marginal utility is positive but it diminishes as the quantity of the good consumed increases.
What is the concept of diminishing marginal utility?
The more you consume of the good, the higher total utility is but the marginal utility gained decreases.
The tendency for MU to decrease as the consumption of a good increases is so general and universal that it is given the status of a principle.
How do consumers make utility maximising choice?
Discovering this choice involves combining the constraint imposed by the budget and the consumer’s preferences and find the point on the budget line that gives the consumer maximum attainable utility.
What is the consumer equilibrium?
A situation where a consumer has allocated all available income in the way that maximises total utility relative to the price of the good.
What is marginal utility per dollar?
MUpD is the marginal utility from a good that results in spending one more dollar on it.
What is the utility maximising rule?
A consumer’s total utility is maximised by spending all the available income and equalising the marginal utility per dollar for all goods
How to consumers equalise the marginal utility per dollar for all goods?
This is done through moving the dollars from good A to good B if doing so increases the utility of good B more than it decreases the utility of good A. This is possible if the MUpD from good A also increases that of good B.
What is marginal analysis?
Comparing the marginal gain from having more of one good with the marginal loss from having less of another good. If the marginal gain from an action exceeds the marginal loss, take action.
