ECON 101 - Chp 8 - Utility + Demand Flashcards
Define consumption choices
choices that you make as a buyer of goods and services
what influences consumption choices?
- consumption possibilities
- preferences
define consumption possibilities
all the goods + services you can afford to buy
What limits our consumption possibilities?
- limited by income
- limited by price
define the budget line
line that marks the boundary between those combinations of goods + services that a household can afford to buy and those it cannot afford
what causes changes in consumption possibilities
- change in income
- change in price
how does the change in income affect consumption possibilities (budget line)
shifts the budget line inwards or outwards, but the slope stays constant
how does change in price affect consumption possibilities (budget line)
the slope of the budget line is changed.
define preferences
one’s dislikes + likes
define utility
benefit or satisfaction that a person gets from the consumption of goods + services
define total utility
the total benefit that a person gets from the consumption of all the different foods + services
what is total utility dependent on?
level of consumption
define marginal utility
change in the total utility that results from a 1 unit increase in the quantity of the good consumed
what’s positive marginal utility?
goods + services that people value/enjoy - total utility increases as
can there be negative marginal utility or lower total utility?
yes - pollution, hard labour
define the principle of diminishing marginal utility
tendency for marginal utility to decrease as the consumption of a good increases
how do we find the utility-maximizing choice
find the point on the budget line that gives the consumer the maximum attainable utility (based on the consumer’s preferences)
find the maximum total utility from the just affordable combination
define consumer equilibrium
situation in which a consumer has allocated all of their available income to maximize their total utility
define marginal utility per dollar
the marginal utility from a good that results from spending one more dollar on it
what are the conditions to the utility-maximizing rule
- spend all the available income
- equalize the marginal utility per dollar for all goods - means that total utility cannot be increased further (MUc/Pc = MUm/Pm)
what’s the rule to follow for power of marginal analysis
if the marginal utility per dollar from good Y is larger than the Marginal utility from good X, get more of good Y
if marginal gain from an action exceeds marginal loss, take the action
what’s the formula to find the marginal utility - in terms of good X and good Y
MUy = MUx * (Py/Px)
what does the ratio Py/Px mean?
is the relative price of good y in terms of good x
what’s the effect of a fall in the price of a good?
- new just-affordable combinations
- new marginal utility per dollar form the good
- new point to equalize the marginal utilities per dollar
- substitution + income effect in play - one can use the fall in price to buy more of another and one can afford more of a good that fell in price
- increase in quantity demand
- change in demand for another good (complement or substitute) (usually a shift leftward as they are seen as substitutes)?
What’s the effect of a rise in price of a good?
- new just-affordable combinations
- new marginal utility per dollar form the good
- new point to equalize the marginal utilities per dollar
- income effect in play - one can afford less of a good that rose in price
- decrease in quantity demand
- change in demand for another good - no change in demand if quantity of the other good stays the same
what’s the effect of a rise in income
with a larger income, the consumer always buys more of a normal good
- the demand curve shifts rightward
- new just-affordable combinations
- new marginal utility per dollar form the good
- new point to equalize the marginal utilities per dollar
what’s the resolution of the paradox of value in terms of total utility and marginal utility?
when a good’s total utility is large but the marginal utility is small, the value of the good is diminished
when a good’s total utility is small but the marginal utility is high, the value of the good is high
is the marginal utility per dollar for water and diamonds the same?
yes
how is the value paradox resolved by the consumer surplus?
water is cheap, but brings a large consumer surplus
diamonds are expensive but bring a small consumer surplus
what does the concept of utility help us make predictions on ____?
predictions about consumption choices
marginal utility theory does not enable us to predict ______?
how buying plans change
marginal utility theory enables us to understand _________?
why people buy more of a good or services when its price falls and why people buy more of most goods when their incomes increases + resolves the paradox value.
define behavioural economics
studies the ways in which limits on the human brain’s ability to compute and implement rational decisions influence economic behaviour
what does behaviour economics look for?
looks for anomalies (choices that do not seem to be rational
what are the 3 impediments that prevent rational choice?
- bounded rationality
- bounded willpower
- bounded self-interest
define bounded rationality
rationality that is limited by the computing power of the human brain
when faced with uncertainty, people make decisions based on instinct, from others, or rules of thumbs rather than rational calculation
define bounded willpower
the less-than-perfect willpower that prevents us from making a decision that we know, at the time of implementing the decision, we will later regret
define bounded self-interest
limited self-interest that results in sometimes suppressing our own interest to help others
what are the 2 main applications of behavioural economics? why?
- finance - uncertainty is a key factor
- savings - future is a key factor
define the endowment effect
tendency for people to value something ore highly simply because they own it
which behavioral effect goes against marginal utility
the endowment effect
define neuroeconomics
study of the human brain when a person makes an economic decision
what type of discipline is neuroeconomics
experimental discipline
what observations have been made in neuroeconomics
- some economic decision are in the prefrontal cortex (store memories, analyze data, anticipate the consequences of our actions)
- some economics decision are in the hippocampus (store memories of anxiety and fear)
what’s the objective of neureconomics
uses the ideas + tools of neurosciences to study the effects of economic events and choices in side the human brain
