Consumers Flashcards
What does a budget line show?
the possible combinations of two goods that a person can consume, given the amount
of money he/she has to spend and the prices of the two goods
On the budget line, the further from the origin,
the higher the income
On the budget line, steepness of the curve measures
the relative prices of the two goods:
–PC/PF
What causes the budget line to rotate?
A change in the relative price of one of the goods
What happens to the relative price, if one good falls by 1/2
Also falls to 1/2
What does the utility function do?
attaches a number to anything
What is the importance of the utility function?
individuals act as if they are maximizing their utility
What 3 assumptions do economists make about consumer preferences?
- Completeness - consumers can compare and rank product bundles
- Transitivity - consumers are consistent in decision making
- More is better than less
What assumptions are made on utility?
- Utility is increasing in amount of good consumed
2. Utility is increasing at a decreasing rate
What is marginal utility and how is it calculated?
The extra utility for an extra unit of good, derivative of utility
How is utility maximisation illustrated
indifference curves
The indifference curve shows
Bundles of goods that give the same level of utility
A higher utility level is indicated by
the curve being further from origin
The indifference map is used to
map consumer preferences - applies assumptions about consumer preference
How do we predict a consumer’s preference on the indifference map?
- located on budget line
- budget line and indifference curve are tangential
- highest level of satisfaction from combination of goods/services
How do we calculate total utility?
Sum of utility * quantity for each product
Optimal choices imply
marginal benefit = marginal opportunity cost
Marginal rate of substitution is
the amount of a good that a consumer is willing to give up in order to obtain an additional unit of another good
Which one is concave and which one is convex? Indifference and Utility
Utility is concave, Indifference is convex
What does diminishing marginal utility indicate?
the more the consumer has of one of the goods (food), the less willing he or she is to give up the other good (clothing) and vice versa
How do we find out the MRS between two goods?
Slope of the indifference curve
Slope of perfect substitutes
Y=-mx +c
Slope of perfect complements
Y = z, x = z, Y=mx+c relationship
The income-consumption curve traces out
utility-maximising
combination of the two goods for all levels of income
Positive income-consumption curve means
Normal goods
Engel curves
Use income-consumption curves to relate person’s income to consumption of good
What can happen to a good when income rises?
Becomes inferior - consumption reduces
