Microecon chapter 6 Flashcards
Preference
What you like / don’t like
Utility
Benefit / satisfaction from consuming a good or service
Total utility and quantity relation
Positive
low level => high increase
high level -> low increase
Marginal utility and quantity relation
Negative
Marginal utility formula
ΔTU/ΔQ = ΔTU/1
How to maximize total utility
Spreadsheet solution
Consumer equilibrium
Highest total utility
Utility maximizing formula
MUA/PA = MUB/PB
Income effect (IE)
ΔQd as a result of a Δ in real income
Substitution effect
ΔQd as a result of a Δ in relative price (always moves in the opposite direction of the ΔP)
Marginal rate of substitution (MRS)
Rate at which consumer give up good x for more good y and remain indifferent
Indifference curve (IC)
Line that shows the combination of goods among which a consumer is indifferent
Slope of IC
Tangent line to IC
Diminishing MRS
As we consume more of y, we progressively consume less of x
How to max utility with IC
Best affordable point on the highest IC
Income consumption curve (ICC)
Shows how purchases react to a ΔI
ICC positive slope
Normal good
ICC negative slope
Inferior good
Price consumption line
How do purchases Δ when P change
Giffen goods
Product with a positively sloped demand curve
Griffen goods characteristics (2)
- Inferior good
- Takes a large portion of total household expenditure (large income effect)
Conspicuous consumption goods
Goods with “snob appeal”
Paradox of value
Why some essentials to life are low price and some non-essentials to life high price?
