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Uni Econ micro > Consumer Theory > Flashcards

Consumer Theory Flashcards

1
Q

What does indifference mean?

A

Indifference= doesn’t bother/mind compared to current predicament, any point is the same utility

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2
Q

What does it mean below the indifference curve?

A

Below the indifference curve= not preferred,

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3
Q

What does it mean above the indifference curve?

A

above = preferred (marginal benefit

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4
Q

What do we expect of a rational buyer?

A

All bundles can be compared and all bundles can be ranked consistently

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5
Q

Why do we have axioms

A
  1. Have simplest possible theory
  2. Make clear hidden assumptions
  3. Develop testable predictions
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6
Q

What do we expect of most people most of the time?

A

SImilar bundles should have similar rankings

More is better

Averages preffered to extremes

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7
Q

How many axioms do we have?

A

5

  1. Completeness (all bundles can be compared
  2. Transitivity (all bundles can be ranked consistently)
  3. Continuity (similar bundles have similar rankings)
  4. Monotonicity (more is preferred to less)
  5. Convexity (averages preferred to extremes)
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8
Q

What are the well behaved prefences?

A

Axiom 3- continuity

Axiom 4- Monotonicity

5- Convexity

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9
Q

Describe axiom 1 - completeness

A

AXIOM 1: COMPLETENESS (all bundles can be compared)

For bundles A and B:
either A is (weakly) preferred to B or vice versa

● Weak preference versus strict preference

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10
Q

What are axioms for?

A

rational consumers

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11
Q

Describe axiom 2 transitivity

A

AXIOM 2: TRANSITIVITY (all bundles can be ranked consistently)

For all bundles A, B and C:
If A is preferred to B and B is preferred to C, then A is preferred to C

EXAMPLE: A = Porsche B = Ford C = Vauxhall If A1 and A2 hold, we say a preference ordering exists

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12
Q

Describe axiom 3- continuity

A

‘Well behaved’ preferences

AXIOM 3: CONTINUITY (similar bundles have similar rankings)

For all bundles A, B and C:
If A is strictly preferred to B and B is ‘close’ to C, then A is (weakly) preferred to C

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13
Q

Describe axiom 4- monotonicity

A

‘Well behaved’ preferences

AXIOM 4: MONOTONICITY (more is preferred to less)

For all bundles A and B:
If A has more of both goods than B, then A is strictly preferred to B

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14
Q

Describe axiom 5- convexity

A

AXIOM 5: CONVEXITY (averages preferred to extremes)

If A is indifferent to B and C is on a line connecting A and B, then C is (weakly) preferred to A and B

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15
Q

What is utility?

A

The number assigned to a bundle is called total utility- how much satisfaction a bundle yields, often in ‘utils’ as the unit

Utility is only an ordinal concept (only ranking matters)

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16
Q

For axiom 1, 2 and 3 what can be used to represent them?

A

AXIOM 1, 2 & 3: indifference curves can be used to represent preferences

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17
Q

What does the indifference curve for axio 4 look like?

A

AXIOM 4 Monotonicity: indifference curves are downward sloping

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18
Q

What does an upward sloping indiffierence curve suggest?

A

An upward sloping Indifference curve suggest indifference when somebody’s got more of both goods

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19
Q

What does a downwards sloping indifference curve suggest?

A

A downward sloping indifference curve suggests a tradeoff between the two goods

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20
Q

Graph to show upwards sloping and downward sl;oping indifference cruves

A
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21
Q

How are indifference curves bowed?

A
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22
Q

What shape does axiom 5 convexity have?

A

AXIOM 5 Convexity (averages are preferred to extremes): indifference curves have familiar shape

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23
Q

What does it mean if indifference curves cross?, graph too

A
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24
Q

What does axiom 2, trasivity say about indifference curves?

A

They cannot cross

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25
What are indifference curves for perfect susbitutes and what does this indicate? Graph too
26
What are indifference curves for perfect complements and what does this indicate? graph too
27
What are bads indifference curves and draw graph?
28
What is a bliss point indifference curve? Graph too
29
Summary notes for indifference curves
30
What is a buyers choice cosntrained on?
by what they can afford
31
What is a consumer?
A price taker
32
What does being a price taker constitute?
Price is constant no matter how much one buys
33
WHat does a budget constraint show? Graph too
34
Graph to show an increase in income on the budget constraint
35
Graph to show a price increase on the budget constraint
36
What does the slope show on a budget constraint? Graph too please
Slope shows the rate at which an individual can trade one good for another
37
When is a budget constraint linear?
Only linear if the price per unit is the same for all units
38
Diagram to show budget constraints, quantity discounts
39
Graph to show non linear budget constraints, quality rationing
40
What does putting indifference curves and budget constraints together show?
41
What is the optimal point?
Is at a point where the budget constraint is tangent to the indifference curve. At this point the slope of the udget constraint equals the slope of the indifference curve
42
What does the slope of the indifference curve show?
The rate at which an individual will trade one good for another- the slope shows the worst acceptable terms of trade for an individual to substitute one for another
43
Graph to explain the slope of an indifference curve
As ∆X gets smaller, ∆Y/∆X approaches the slope of the indifference curve is = MRS Recall that the slope of the indifference curve is MRS
44
What is the slope of the indifference curve?
Maringal rate of substitution (MRS)
45
At the optimal choice...
The slope of the budget constraint is the same as the slope of the indiffence curve
46
Graph to show the properties of the interior solution
47
What are corner solutions and graph to show
48
Summary notes for constrained opitmisation
49
What does the income consumption curve show?
The income consumption curve shows how consumption varies with income
50
What does increasing income do to the budget cosntraint curve?
Shifts it to the right
51
What does decreasing income do to the budget constraint curve?
Shifts it to the left
52
Graph to show income consumption curve
53
Describe the income consumption curve for an inferior good
It is downards sloping
54
Graph to show the income-consumption curve of an inferior good
55
What can we use to illustrate the relationship between income and consumption of a good?
Indifference curves
56
What is the slope of th engel curved linked to and why?
The income elasticity of demand because we are looking at how the increase in income affects the demand of good x or y
57
What is the engel curve?
Engel Curves are the locus of all points representing the quantities demanded of the goods at various levels of income, when prices and preferences are held constant
58
Diagram to show the engel curve
59
What does the price consumption curve show?
How consumption varies with price
60
What does decreasing the price of good X do to the budget constraint?
Pivots the budget constraint outwards from the origin
61
Diagram to show a decrease of price on the budget constraint
62
Diagram to show how the price consumption curve can be used to show how consumption varies with price
63
Why can the Diagram to show how the price consumption curve can be used to show how consumption varies with price
Thisderivestheconsumer’s demand curve which can then be used to derive the market demand curve
64
What is the income effect?
1) INCOME EFFECT People feel poorer: They cannot buy as much with their fixed income
65
What is the substitution effct?
2) SUBSTITUTION EFFECT People change their consumption: They buy similar but rival products or they spend their money on other products
66
How can the income effect be dervied from the indifference framework?
1): how price change affects consumption holding relative prices constant
67
How can the substitution effect eb derived using the indiffernce framework?
how price change affects choice holding utility constant
68
Indiffrerence diagram to show the subsitution effect from an increase in the rpice of good X
69
Indiffrence diagram to derive the income effect from an increase in the price of good x
70
For inferior goods, hwo do the income and subsitiution effcts work?
In opposite directions
71
Diagram to shwo the income and subsitution effects for an inferior good
72
How do the substituion and income effects work for normal goods?
In the same direction
73
What is a giffen good?
A Giffen good is a special kind of inferior good. The income and substitution effects work in opposite directions, and the income effect dominates
74
Indifference curve for giffen good
75
Summary notes of rincome and substituion
76
What is the equation for income?
77
Diagram to show optimal choice of lesire and work
78
Diagram to show how an increase in wages affects the work and leeisure balance
79
Diagram to show the deriviation of the relationship between wage and labour
80
Diagram to show backwards bending labour supply curve
81
Diagram to show the income and substitution effcts on a backwards bending labour supply curve
82
Diagram to show how income tax rates affect the leisure and income diagram
83
Diagram to show how unemployment benefits impact the lesiure income diagram
84
Summary notes for the consumption leisure model
85

Uni Econ micro (7 decks)

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