Exam 1 Definitions (from exam study guide & workbook) Flashcards
What are the three assumptions we can make about consumer preferences?
Completeness
Transitivity
More is better
Assumption 1: Completeness explanation
Consumer can compare any two bundles of goods (A&B) and say.. A if preferred to B, vice versa and that they are indifferent between the two
Assumption 2: Transitivity explanation
For any three bundles (A,B,&C), if A is weakly preferred to B and B is weakly preferred to C, the A is weakly preferred to C
Assumption 3: More is better explanation
If bundle A has at least as much of all goods as bundle B & bundle A has more of some good than bundle B, bundle A is preferred
Way of indifference curve if Good X & Good Y are perfect substitutes
From origin straight out but on a linear graph
Way of indifference curve if Good X & Good Y are perfect complements
From origin straight out but on L shaped lines
Way of indifference curve if X is “good” & Y is “bad”
linear lines with positive slope with an arrow heading towards x axis intercepting them
Way of indifference curve if X is “good” & Y is “neutral”
straight horizontal lines with arrow going up from bottom line
Difference between MRS and MRT
MRS: focuses on demand (aka rate at which consumer is willing to trade a good for another)
-MUx/MUy
MRT: focuses on supply (aka rate at which consumer is able to trade a good for another)
-Px/Py
Explain what is being measured on both the vertical and horizontal axes for a price-consumption curve
Vertical axis: Quantity of good Y
Horizontal axis: Quantity of good X
Explain what is being measured on both the vertical and horizontal axes for an income consumption curve
Vertical axis: Quantity of good Y
Horizontal axis: Quantity of good X
Explain what is being measured on both the vertical and horizontal axes for a demand curve
Vertical axis: Price of good X
Horizontal axis: Quantity of good X
Budget constraint
How much of each good given the amount of money
Explain what is being measured on both the vertical and horizontal axes for an Engel curve
Vertical axis: Income
Horizontal axis: Quantity of good X
Shifts of budget constraint
shifts depend on changes in total money available and change in price of goods
Preferences
consumer can prefer one thing over another or can be indifferent about certain bundles
Utility
Satisfaction
Utility function
measures consumers preferences for a set of goods and services
Marginal utility
added satisfaction that a consumer gets from having one more unit of a good or service
Law of diminishing marginal utility
marginal utility from each additional unit declines as consumption increases
Indifference curves
various combinations of two goods or services that leave the consumer equally well off or equally satisfied
Cobb- Douglas
have indifference curves that are downward sloping
Perfect substitution
straight line as indifference curve (think apple and orange juice since either way consumer still gets juice)
Perfect complements
L shaped indifference curve (think hot dogs & buns… don’t want one without the other)
Price consumption curve
shows how a consumers consumption choices change when the price of one of the goods changes
Demand curve
relationship between the price of a good or service and the quantity demanded for a given period of time
Engel curve
shows the relationship between the amount of money that the consumer has available to spend and quantity of a good that a consumer chooses to buy in their optimal bundle
Income consumption curve
shows how the consumers optimal bundle changes when the consumers income changes while holding prices consistent
Income effects of a price change
change in the consumption of goods by consumers based on their income a.k.a. purchasing power
Substitution effects of a price change
when consumers replace cheaper items with more expensive ones due to price changes or financial conditions
Indirect utility function
A function of prices of goods and the consumers income or budget
Expenditure function
The minimum amount of money and individual needs to spend to achieve some level of utility given a utility function and prices of available goods
Compensating variation
The amount of additional money consumer would need to reach their initial utility after a change in prices
necessary conditions
those that must be present for an event to occur
Sufficient conditions
A condition or set of conditions that will produce an event
