Session 2: Consumer choice, demand curves, elasticity Flashcards
What is the utility curve?
A graph that shows the always increasing (at a continuously diminished rate) rate of utility one gets from consuming more goods
The more of a good one has…
The larger total use value, but lower marginal use value
Marginal Utility
Extra utility (happiness) gained from one additional unit
What is the indifference curve?
A graph that shows two products, with a person’s preferred combination of those products graphed as a curve
What is the marginal rate of substitution?
The point at which you’re willing to make a trade-off in the indifference curve
Shown as a linear slope
What is the shape of an indifference curve with substitute products?
Regular curve
Trade-off is almost consistent
What is the shape of an indifference curve with complementary products?
Looks almost like an L
Trade-off is not consistent
What is the budget constraint graph?
A graph with a product on each axis that shows what combinations of those products a person can afford (straight line)
What would cause the budget constraint graph to become steeper?
Price of one of the products increases
How is demand determined?
Tangent point of budget constraint line and one of a person’s utility curves
Are complements sensitive to price? What does their demand graph look like?
No
Looks like a normal curve
Are substitutes sensitive to price? What does their demand graph look like?
Yes
Looks like an L
Is the demand curve changed by prices?
No
Normal goods have a…
Positive income elasticity
Inferior goods have a…
Negative income elasticity
What is the price elasticity of demand?
Describes how sensitive quantity demanded is to price change
% change in quantity demanded for a 1% increase in price
What does elastic mean?
Price changes cause big changes in quantity demanded
What does inelastic mean?
Price changes cause small changes in quantity demanded
What does an elastic demand graph look like?
Nearly flat line, curving downward
What does an inelastic demand graph look like?
Nearly vertical curve to the right
When a product is inelastic, its price elasticity is…
Less than 1
When a product is unitary, its price elasticity is…
~ 1
When a product is elastic, its price elasticity is…
Greater than 1
