Economics chap 4 Flashcards
Consumer choices, producer choices,
Standard economic model
Classical theory of consumer behavior assumes rational behavior
Assumptions made about consumers
Buyers are rational
More is preferred to less
Buyers seek to maximize their utility
Consumers act in self-interest and do not consider the utility of others
Utility
satisfaction that is derived from consuming a product/service
Budget constraint
Depicts the limit on the consumption “bundles” that a consumer can afford
Indifference curve
Is a curve that shows consumption bundles that give the consumer the same level of satisfaction, what you prefer
Marginal utility of consumption
The increase in utility that the consumer gets from an additional unit of that good
Diminishing marginal utility
To the tendency for additional satisfaction from consuming extra units of a good to fall(having too much of something)
Marginal rate of substitution
The rate at which a consumer is willing to trade one good for another
A price change has two effects on consumption
An income effect-Change of consumption due to a lower price
A substitution effect-Change in consumption that arises because a price change encourages greater consumption of the good that has become relatively cheaper
Giffen goods
Describe a good that violates the law of demand
Price increase raises quantity demanded
Income effect dominates the substitution effect
They have demand curves that slop upwards
Engel curve
As income rises the proportion of income spent on food decreases whereas the proportion of income devoted to other goods such as leisure increases
Bounded rationality
Is the idea that humans make decisions under the constraints of limited and sometimes unreliable information
Why does irrationality exist?
People are overconfident
Are reluctant to change their minds
Have a tendency to look for examples which confirm their existing view
Give too much weight to a small number of observations
Types of Heuristics
Anchoring-using familiarity to make decisions
Availability-assessing risks of the likelihood of something happening
Representativeness-Decisions made based on how representative something is to a stereotype
Persuasion-Attributes a consumer attaches to a product or brand
Simulation-Visualizing or simulating the outcome of a decision
Income effect-is reflected by the movement from a lower to higher indiff curve
The substitution effect-is reflected by a movement along an indiff curve to a point with a diff slope
Explicit vs Implicit costs
Explicit costs are input costs that require a direct outlay of money by the firm
Implicit costs are input costs that do not require an outlay of money by the firm
Time periods
Short-run(some fixed costs)
Long-run(fixed costs become variable costs)
