The Theory of Individual Behavior Flashcards
What is consumer behavior?
Consumer behavior examines how individuals make decisions to allocate their resources (time, money, effort) among various goods and services.
What are consumer opportunities?
Consumer opportunities refer to the set of possible goods and services that consumers can afford to consume given their budget constraints.
What are consumer preferences?
Consumer preferences determine which set of goods and services will be consumed based on the satisfaction they provide to the consumer.
What are the properties of consumer preferences?
Completeness:
- Consumers can compare and rank all possible bundles of goods.
More is better:
- Consumers prefer more of a good to less.
Diminishing marginal rate of substitution:
- As a consumer obtains more of one good, they are willing to give up less of another good to get additional units of the first good.
Transitivity:
If a consumer prefers bundle A to B and B to C, then they prefer A to C.
What is the budget constraint?
The budget constraint is the restriction set by prices and income that limits the bundles of goods affordable to consumers.
What is consumer equilibrium?
Consumer equilibrium is the consumption bundle that is affordable and yields the greatest satisfaction to the consumer.
What happens to the budget constraint when income changes?
An increase in income shifts the budget constraint outward, allowing for more consumption, while a decrease in income shifts it inward.
How do price changes affect consumer equilibrium?
Price changes alter the budget constraint and can lead to a new consumer equilibrium depending on whether the goods are substitutes or complements.
