Microeconomics Week 1 Flashcards
What are the basic assumptions made about consumers in consumer theory?
The assumptions are: 1. Buyers are rational. 2. More is preferred to less. 3. Buyers seek to maximize their utility. 4. Consumers act in self-interest and do not consider the utility of others.
What is utility in the context of consumer theory?
Utility is the satisfaction derived from the consumption of a product. It helps in ranking preferences and indicates the value consumers place on a good by the amount they are willing to pay.
What is total utility (TU)?
Total utility (TU) is the satisfaction that consumers gain from consuming a product.
What is marginal utility (MU)?
Marginal utility (MU) of consumption is the increase in utility that the consumer gets from an additional unit of that good.
What is diminishing marginal utility?
Diminishing marginal utility refers to the tendency for the additional satisfaction from consuming extra units of a good to fall.
What do consumer preferences indicate?
Preferences indicate a consumer’s choice among consumption bundles, illustrated with indifference curves that show bundles giving the same level of satisfaction.
What are the properties of indifference curves?
Properties include: 1. Higher indifference curves are preferred to lower ones. 2. Indifference curves are downward sloping. 3. Indifference curves do not cross. 4. Indifference curves are convex.
Why are indifference curves downward sloping?
Because good X and good Y are imperfect substitutes, meaning consumers will give up some amount of one good to gain more of another while maintaining the same level of satisfaction.
Why do indifference curves not intersect?
Indifference curves do not intersect because each curve represents a different level of satisfaction, and intersecting curves would imply the same level of satisfaction for different bundles, which is impossible.
Why are indifference curves convex?
Indifference curves are convex because the marginal rate of substitution (MRS) decreases as we move down the curve, indicating people 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 marginal rate of substitution (MRS) is the rate at which a consumer is willing to trade one good for another. It is represented by the slope of the indifference curve at any point and equals the marginal utility of one good divided by the marginal utility of the other good.
What are the characteristics of perfect substitutes in indifference curves?
Perfect substitutes have straight-line indifference curves with a fixed MRS. Consumers will consume either at the x-axis or the y-axis.
What are the characteristics of perfect complements in indifference curves?
Perfect complements have right-angle indifference curves with an MRS of zero. Consumers consume the goods in fixed proportions.
How are economic ‘bads’ represented in indifference curves?
Economic ‘bads’ (e.g., anchovies) and ‘goods’ (e.g., pepperoni) for a consumer are represented with indifference curves that have a positive slope.
How are neutral goods represented in indifference curves?
Neutral goods (e.g., a consumer likes pepperoni but is neutral about anchovies) have vertical indifference curves.
