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Economics > Consumer Theory I > Flashcards

Consumer Theory I Flashcards

1
Q

What do Consumer Preferences tell us?

A

Tell us where Demand comes from

Helps explain how Consumers decide how much of Goods to Consume

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2
Q

What is the main Assumption we make about Consumption Bundles?

A

Consumption Bundles only contain 2 Goods

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3
Q

What is the Problem for the consumer with Consumption Bundles?

A

Consumer must choose between Different Bundles containing Different amounts of the same 2 Goods

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4
Q

What do Consumer Choices depend on?

A

Depend on their Preferences- i.e. Tastes

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5
Q

What are the 5 Axioms of Consumer Theory

A

Completeness + Transitivity- Define a utility Function given the Agent is Rational
Monotonicity + Local Nonsatiation + Convexity

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6
Q

What is Completeness?

A

Consumer can Rank Bundles

A is preferred to B, or Vice versa, or Indifferent

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7
Q

What is Transitivity?

A

Consumer’s Preferences are Logically Consistent

-If you want a Good now, you still want it later

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8
Q

What is Monotonicity?

A

Consumer always prefers More to Less

‘More is Better’

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9
Q

What is Local Nonsatiation?

A

You can ALWAYS find a Bundle y similar to x, but preferred to it
Weaker form of Monotonicity

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10
Q

What is Convexity?

A

People prefer Variety

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11
Q

How do you denote Bundle x is weakly preferred to bundle x1?

A

x ≥ x1

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12
Q

How do you denote x is strongly preferred to x1?

A

x > x1

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13
Q

How do you denote 2 bundles, x and x1, are Equivalent to each other- Indifferent

A

x ~ x1

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14
Q

When x is high, is a Consumer willing to give up More or Less for Good y?

A

More Willing

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15
Q

If Axioms Completeness + Transitivity are satisfied, what do people do when choosing bundles?

A

People Compare various bundles + decide on Utility Maximising Bundle

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16
Q

Define Utility Function

A

Relationship between Utility Measures + every possible Bundle of Goods

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17
Q

How do you denote the Utility Function for 2 Goods, x + y?

A

U(x, y)- given you can choose how much of each good you want to consume
It represents your Preferences

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18
Q

What 2 Measures can a Utility Function be?

A

Cardinal + Ordinal

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19
Q

When is a Utility Function a Cardinal Measure?

A

If we can give numbers to different levels of Utility + we can make Absolute Comparisons between those different numbers
e.g. Utility of 100 is 2x as much as Utility of 50

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20
Q

When is a Utility Function an Ordinal Measure?

A

If only ranking between different bundles matters
CANNOT make Absolute Comparisons
e.g. Utility of 100 is more than Utility of 50 but difference does NOT mean anything

21
Q

What is required for a Utility to be Cardinal?

A

a Proper unit of Measurement

e.g. Unable to measure Happiness- so would be Ordinal

22
Q

What does an Indifference Curve show?

A

Combination of all bundles that a Consumer sees as Equally desirable
-Bundles that give same level of utility

23
Q

What is the Utility Function of 2 goods that are NOT perfect Substitutes?

A

U(x, y) = xy

So xy = Utility

24
Q

What are the 5 main properties of Indifference Curves?

A
  1. Bundles further from Origin are Preferred to this on Ic closer to Origin- due to Monotonicity of Preferences
  2. There is an Ic through every possible Bundle- due to Completeness of preferences
  3. Ic CANNOT CROSS- Due to Transitivity
  4. Ic Slope DOWNWARDS- due to Strong Monotonicity
  5. Ic CANNOT be THICK- due to Local Nonsatiation + Monotonicity
25
Q

Why can’t Ic CROSS?

A

CANNOT determine Preferences from Ics if they Cross

26
Q

Which Utility Functions show Convexity? Convex Ics

A

U.Fs where Goods only enter Multiplicatively

how many units of Good y is the Consumer willing to give up for 1 extra unit of Good x?

27
Q

What is the Marginal Rate of Substitution?

A

Maximum amount of One Good a Consumer will Sacrifice to obtain One more unit of Another Good whilst maintaining the same level of Utility

28
Q

How do you calculate the MRS?

A

dy/dx = (yb - ya) / (xb - xa)

29
Q

What does a Negative MRS show and what is always Negative?

A

Trade off between 2 Goods
yb - ya is always Negative
To have more of one good, you must have less of the other good
MRS changes along the Ic

30
Q

What does MRS show?

A

The amount of Good y you are willing to sacrifice (dy) if you increase amount of Good x by an amount of dx

31
Q

What does Diminishing Marginal Rate of Substitution mean?

A

MRS decreases along the Ic

Willing to sacrifice less of Good y to increase Good x

32
Q

What is the Budget Constraint Function?

A

M = Px(x) + Py(y)

Total Income = Price of x (x) + Price of y (y)

33
Q

What assumption do we make about the consumer and their income?

A

Assume the Consumer spends ALL of their Income

34
Q

What is the equation of the Budget Line?

A

y = M/Py - Px/Py (x)

35
Q

What does Px/Py show?

A

MRS
Opportunity Cost of x in terms of y
Price Ratio of x and y

36
Q

If Income Increases, what happens to the B.C?

A

B.C SHIFTS to the RIGHT

More Income=> Higher Budget

37
Q

If Income Decreases, what happens to the B.C?

A

B.C SHIFTS to the LEFT

Less Income=> Lower Budget

38
Q

What happens to the B.C if Px or Py changes?

A

B.C ROTATES
Rotates Left- if Px Increases relative to Py
Rotates Right- if Px Decreases relative to Py

39
Q

What does a Rational Consumer decide on?

A

How much to Consume if they Maximise Utility

Would choose Bundle tangent to B.C

40
Q

When are Goods considered Perfect Substitutes?

A

When CONVEXITY is NOT Satisfied

41
Q

What is the Utility Function of Perfect Substitutes?

A

U(x, y) = x + y

42
Q

What is the shape of the Ic of Perfect Substitutes?

A

Straight Line- MRS is Constant

Not Convex

43
Q

How does a Consumer choose which Good to consume + why do they only Consume 1 good?

A

Choose whichever good gives Higher Utility/ unit of money spent
Only consume 1 good because no point in consuming higher cost good if perfect substitutes

44
Q

What does not hold true at the Optimal Bundle for Perfect Substitutes?

A

MRS = Px/Py because MRS ≠ Px/Py
MRS < Px/Py as Consumer will only consume Good y
U(x, y) = cx + dy

45
Q

Define Perfect Complements

A

2 Goods that are always consumed together in FIXED PROPORTIONS
e.g. Left + Right Shoe

46
Q

What is the shape of the Ic for Perfect Complements?

A

L-Shaped

47
Q

Which axiom is not satisfied for Perfect Complements?

A

Convexity- there is no variety

48
Q

Why do Personal Ic vary?

A

not everyone has the SAME Utility Function

People value goods differently- this impacts the slope of their Ic

Economics (20 decks)

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