Module 3 Flashcards
What is utility?
How much SATISFACTION (/happiness/enjoyment) a consumer gets from consuming something. Measured in theoretical utils.
What is the law of diminishing marginal utility?
Consumers experience less marginal utility with each additional unit of consumption of a good during a given time period.
What is the Rule of Equal Marginal Utility per Dollar Spent?
People maximize their utility so they’ll get additional units up until their marginal utility per dollar spent would be equal to or less than with a different choice.
What is a Giffen Good?
- Upwards sloping demand curve because they are inferior goods
where the income effect (causes demand to increase as price increases) has to outweigh the substitution effect (causes demand to increase when price decreases).
What is the substitution effect on an inferior good?
Same as a normal good - as price increases quantity demanded will decrease.
What does the income effect do with an inferior good?
The income effect on an inferior good means that as price rises, more is bought, and vice versa.
What is a network externality?
The usefulness of some products increases as more people own them.
What do switching costs do?
People stick with inferior products because the cost to switch to a different product is so high (iPhone vs Android).
What is Path Dependence?
Due to switching costs, the first technology on the market has an advantage over superior technologies.
Does switching cost cause a market failure?
This is up for debate.
Does consuming goods as a group have an effect on perceived value?
Yes, so if the price goes up too much and fewer people are consuming the good, it’s marginal utility to other people decreases.
