Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

BUEC 211 > Consumer Theory > Flashcards

Consumer Theory Flashcards

1
Q

What theory do economists rely on to understand how consumers make decisions

A

Theory of Consumer Choice

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Theory of consumer choice relies on what main three premises

A
  1. Consumers have preferences that determine the satisfaction they get from the consumption of goods and services
  2. Consumers face constraints that limit their choices
  3. Consumers seek to maximize the level of satisfaction they obtain from consumption given the constraints that they face
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Other than theory of consumer choice what other two explanations are there for consumer choice

A
  1. random decision making - consumers act blindly and make decisions without any thought
  2. individuals make systematic decisions (but then what drives systematic decision making)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What do economists presume consumers use to guide them in choosing between goods

A
  • Economists assume that consumers have a set of tastes or preferences that they use to guide them in choosing between goods.
  • Theses tastes may differ substantially among individuals due to differences in culture, experience, etc.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

The standard model of consumer behavior assumes preferences satisfy what 3 key conditions

A
  1. Completeness
  2. Transitivity
  3. More is better (Non-satiation)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Describe the condition of completeness when it comes to preferences

A

This property says that when facing a choice between any two bundles of goods, a consumer can rank them so that one and only one of the following three relationships are true:

  1. The consumer prefers A to B
  2. Consumer prefers B to A
  3. Consumer likes both equally and therefore is indifferent between the two bundles

–> this condition ensures that consumers can rank all possible bundles of goods in term of their desirability
–> Implication: consumers must be able to decide on preferences for all possible options, indecision is not possible (so indifference is allowed, but not indecision)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Describe the condition of Transitivity when it comes to preferences

A
  • Requires that if a consumer strictly prefers A to B, and strictly prefers B to C, then they also strictly prefer A to C
  • Also applies to weak preferences and indifference relationships
  • Transitivity ensures that individuals are rational in their choice
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Describe the condition of more is better when it comes to preferences

A
  • Requires that consumers always prefer more of a good to less of a good.
  • This condition is referred to as non satiation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

One way to summarize information about consumer’s preferences is to create a

A

preference map/indifference map

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Describe an indifference curve

A

An indifference curve depicts the set of bundles of goods that a consumer views as being equally desirable. –> points lining the same curve are indifferent to each other

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Indifference maps must satisfy what 4 properties

A
  1. Bundles on indifference curves farther from the origin are preferred to those on indifference curves closer to the origin (more is better property)
  2. An indifference curve goes through every possible bundle (completeness assumption, consumer can compare all bundles)
  3. Indifference curves cannot cross (b/c issue of transitivity would occur)
  4. Indifference curves slope downward (if they sloped upwards then we would have a clear preference for the higher bundle because it has more of both goods - issue of more is better property when they are supposed to be equivalent on the curve)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What does the slope of an indifference curve reflect

A

Reflects how willing consumers are to trade one good for another –> known as marginal rate of substitution

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Define marginal rate of substitution

A

The rate at which a consumer is willing to substitute one good for another (= to the slope from one point to another point and then compare those?)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Lets say the y axis is burritos and x axis is pizzas

–> If the marginal rate of substitution is -3 what does that mean exactly

A

That means the she would be willing to get rid of 3 burritos to get one more pizza (the negative shows that she is willing to give up some of one good to get more of the other good)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What does the curvature of an indifference curve tell you

A

Curvature tells us how a consumer’s willingness to substitute between goods changes as the relative quantity of each good changes (so does the willingness to substitute increase or decrease etc.)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

If the indifference curve is convex shaped, preferences will exhibit

A

Diminishing marginal rate of substitution 26

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

If the indifference curve is concave shaped, preferences will exhibit

A

Increasing marginal rate of substitution

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Do most people have concave or convex indifference curves for most pairs of products

A

Convex

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Goods that are perfect substitutes will exhibit what kind of marginal rate of substituion

A

A constant marginal rate of substitution - they are straight linear lines with a slope of a constant rate

–> perfect substitutes are goods that are essentially equivalent from the consumers point of view

–> ex. coke and pepsi

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Goods that are always consumed in fixed proportions are known as what

A

Perfect compliments - (ex. always getting pie with ice cream scoop)

  • They have right angle indifference curves
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What are the three types of preferences we have seen then

A
  • The extreme preferences: perfect substitutes, perfect compliments
  • in between preference: imperfect substitutes
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Our model of consumer behavior assumes that consumers can ________ bundles of goods and services to decide which gives them ___________

A

compare, greatest satisfaction

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Describe the utility from consumption

A

We can basically summarize the preferences by giving each bundle of goods and services that can be consumed a numerical value that reflects the relative ranking of the bundles

  • we can summarize the information contained in the indifference map succinctly using a utility function
24
Q

The idea of describing preferences with utility comes from

A

the 19th century with John Stuart Mill and Jeremy Bentham

25
Q

What does the utility function describe

A

the level of utility obtained from consuming goods and services (can understand how preferences change as consumption bundles change)

–> U= U(B,T)

U = level of utility obtained from consuming B and T respectively

26
Q

Given a utility function, if a consumer prefers bundle (B1, T1) to bundle (B2, T2), then which utility value will be greater

A

U(B1, T1) > U(B2, T2)

27
Q

Do utility functions exist in the real world

A

They do not exist in any fundamental sense, they constitute an economic model of consumer behavior

28
Q

What type of measure is utility

A

An ordinal measure - it is a relative ranking

29
Q

Describe an ordinal measure

A
  • Only contains information about relative rankings
    like 5 star vs 1 star

(whereas cardinal measures are based on absolute numerical comparison like 10kg vs. 20kg)

30
Q

Define marginal utility (MU)

A

Tells us how utility changes as we increase or decrease consumption of one good, holding consumption of all other goods constant

–> the extra utility that a consumer gets from consuming an additional unit of a good is the marginal utility from that good

31
Q

How do you calculate the marginal utility

A

MUb = ∆𝑈/∆𝐵

–> marginal utility for one thing is the change in utility divided by the change in that things quantity?

32
Q

Marginal rate of substitution vs marginal utility

A

MRS = tells us the rate at which a consumer is willing to substitute one good for another

MU = tells us how much consumer satisfaction changes if consumption changes by one unit

33
Q

Show how the marginal rate of substitution can be written in terms of the marginal utilities

A

MRS = ∆B/ ∆Z = -MUZ/MUB

34
Q

What is the first step in determining consumer choice behavior

A

Understanding preferences

35
Q

What is the second step in determining consumer choice behavior

A

Understanding the constraints consumers face when making decisions

36
Q

What is the most important constrain that individuals face in the standard theory of consumer choice

A

the limitations imposed by budget

37
Q

Define the budget line (budget constraint)

A

This depicts all possible bundles of goods that can be purchased if the consumer’s ENTIRE budget is spent on those goods at given prices

38
Q

Define the opportunity set

A

This is the set of all possible bundles of goods that a consumer can buy, including all the budgets inside the budget constraint and on the budget constraint (the budget line)

39
Q

The slope of the budget constraint is known as

A

Marginal rate of transformation (MRT)

40
Q

Define the marginal rate of transformation

A

The trade off the market imposes on the consumer in terms of how much of one good the consumer must give up to purchase more of another good

41
Q

If y-axis is B and x-axis is T what is the MRT

A

-Pt/Pb (looking at price)

42
Q

A marginal rate of transformation of -1/2 means what

A

That you can trade an extra pizza for half a burrito

43
Q

The third step in determining consumer choice behavior is understanding

A

how consumers maximize their well-being, subject to the constraints that they face

44
Q

What is the theory underlying how consumers maximize their well being, subject to the constraints that they face

A
  • Consumers pick the bundle of goods in their opportunity set that gives them the highest level of utility
  • intuition: of all the bundle of goods that they can afford to buy consumers choose the bundle that makes them the happiest
45
Q

So if consumers choose the bundle of goods that make them the happiest, where would there optimal choice be in regards to their indifference curve and their budget line

A

The choice must lie on an indifference curve that touches the budget line, but does not cross it –> by consuming this bundle there is no incentive to change behavior and substitute

46
Q

What is an interior solution

A

where the optimal bundle has positive quantities of all goods and lies between the ends of the budget line.

–> the indifference curve is tangent to the budget line so they will then have the same slope meaning MRS = MRT or MUT/MUB = MUB/PB

47
Q

What is a corner solution

A

where the optimal bundle has a quantity of zero for at least one good, meaning the optimal bundle is at one end of the budget line.

48
Q

Managers often use promotions to induce consumers to purchase more units using deals like buy some get some free

A

They create kinks in the consumers budget line (budget line does not shift but gets bumps in it). Consumers response to such offers depend on their tastes (the shape of their indifference curves)

49
Q

For the buy two get one free promotions, what consumers will take advantage of it

A

The promotion creates a kin in their budget line, if that line still intersects their indifference line, that means there will be an optimal point tangent to a second indifference line and they will take advantage of it

50
Q

What points are there to remember about designing promotions

A
  • properly exploiting promotions requires knowledge of consumer preferences
  • promotions are costly, only use if benefits > costs
51
Q

A half price promotion causes what to happen to the budget line

A

a pricing promotion will always rotate the budget line, meaning the consumer chooses a new optimal bundle

52
Q

What deviations from the theory of consumer choice do we see

A

Behavioral economics seeks to understand the implications of departures from these assumption using insights from psychology, and empirical research on our cognitive and emotional basis

  • there are 3 key findings of transitivity, endowment effects, salience
53
Q

Describe deviations from theory: transitivity

A

transitivty fails when it comes to children and novel goods

54
Q

Describe endowment effects

A

Standard model assumes that individuals value a good the same regardless of whether or not they own it.

Empirical evidence suggests that most people place a higher value on a good if they own it then they do if they are considering buying it.

55
Q

Describe salience effects

A

Standard model assumes that individuals consider all possible information when making a decision.

Empirical evidence suggests that people are more likely to consider information if it is presented in a way that grabs their attention, or if it takes relatively little thought or calculation to understand.

BUEC 211 (3 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions