Jesse Example FC Flashcards
What assumptions are made about consumer behavior in microeconomics?
Assumptions include: 1) Buyers are rational, 2) More is preferred to less, 3) Buyers seek to maximize their utility, and 4) Consumers act in self-interest and do not consider the utility of others.
What is utility?
Utility is the satisfaction derived from the consumption of a product. It indicates how buyers rank products and is reflected by the amount they are willing to pay for a good, representing its value.
What is the concept of opportunity cost in consumer theory?
Opportunity cost is what is given up to make a purchase, representing the value of the next best alternative.
Define total utility (TU).
Total utility (TU) is the total satisfaction consumers gain from consuming a product.
Define marginal utility (MU).
Marginal utility (MU) is the additional satisfaction a consumer gains from consuming an extra unit of a good.
What is diminishing marginal utility?
Diminishing marginal utility is the tendency for additional satisfaction from consuming extra units of a good to decrease.
What are consumer preferences?
Consumer preferences reflect a consumer’s choice among consumption bundles, illustrated by indifference curves.
What is an indifference curve?
An indifference curve shows consumption bundles that provide the consumer with the same level of satisfaction.
What are the properties of indifference curves?
1) Higher indifference curves are preferred to lower ones, 2) Indifference curves are downward sloping, 3) Indifference curves do not intersect, 4) Indifference curves are convex.
What does a convex indifference curve indicate?
It indicates a decreasing marginal rate of substitution (MRS), meaning consumers are more willing to trade goods they have in abundance for goods they have less of.
What is the marginal rate of substitution (MRS)?
The MRS is the rate at which a consumer is willing to trade one good for another, represented by the slope of the indifference curve. It equals the marginal utility of one good divided by the marginal utility of the other.
Describe perfect substitutes in the context of indifference curves.
Perfect substitutes have straight-line indifference curves with a fixed marginal rate of substitution. Consumers consume entirely on one axis (either Good X or Good Y).
Describe perfect complements in the context of indifference curves.
Perfect complements have right-angle indifference curves, indicating goods are consumed in fixed proportions. The marginal rate of substitution is zero.
What happens when a consumer perceives a good as an “economic bad”?
If a good is an “economic bad,” such as anchovies for a consumer who dislikes them, indifference curves have a positive slope.
What are neutral goods in consumer theory?
Neutral goods are goods the consumer neither likes nor dislikes. For instance, if a consumer likes pepperoni but is neutral about anchovies, the indifference curves are vertical lines.
