consumer demand Flashcards
What is utility?
refers to the satisfaction or pleasure a person derives from consuming goods and services.
What are the types of utility?
Marginal and total
What is the difference between total and marginal utility?
Total utility is the overall satisfaction a person gets from consuming a certain amount of goods or services. While, marginal utility is the additional satisfaction or benefit gained from consuming one more unit of a good or service.
What is the law of diminishing utility?
This states that as the quantity of goods consumed by an individual increases the marginal utility of the good will eventual decrease.
What are limitations of utility?
It is subjective
It is unmeasurable
Ignoring External Factors (ads, culture)
Ignores substitutes
Ignores income and price effect
Difficult to compare with others
What is consumer equilibrium?
Consumer equilibrium is the point at which a consumer achieves the maximum possible satisfaction or utility given their budget constraints. It’s where the consumer allocates their income in a way that no further reallocation of spending can increase their utility.
What is the utility approach?
This is when a consumer decides to maximize their satisfaction by consuming a certain amount of a good based on the price of the good and their income level.
What is an indifference curve?
An indifference curve shows all the combinations of two goods that provide the consumer with the same level of satisfaction or utility.
What is the budget line?
The budget line shows the different combinations of two goods that the consumer can afford given their income and the prices of the goods.
What is the marginal rate of substitution (MRS)?
This measures the rate you are willing to forgo the quantity of one good to have more of an other while keeping the level of satisfaction the same.
What is the difference between price and substitution effects approach?
Occurs when a change in the price of a good makes the demand of the good change as well
Occurs when a change in the price of a good affects the demand of its substitute to change too
What is a normal good?
Normal goods are the typical case where demand increases as income rises.
What is an inferior good?
Inferior goods have the opposite relationship, with demand decreasing as income increases.
What is a giffen good?
A type of inferior good, but demand increases when price rises due to strong income effect.
What are some characteristics of the indifference curve?
-Indifference curves slope from left to right
-Indifference curves NEVER intersect
-Indifference curves are convex to the origin
-The further away the IC is from the origin, the higher the level of satisfaction
