The Theory of Individual Behavior

Question 1

What is consumer behavior?

Answer 1

Consumer behavior examines how individuals make decisions to allocate their resources (time, money, effort) among various goods and services.

Question 2

What are consumer opportunities?

Answer 2

Consumer opportunities refer to the set of possible goods and services that consumers can afford to consume given their budget constraints.

Question 3

What are consumer preferences?

Answer 3

Consumer preferences determine which set of goods and services will be consumed based on the satisfaction they provide to the consumer.

Question 4

What are the properties of consumer preferences?

Answer 4

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.

Question 5

What is the budget constraint?

Answer 5

The budget constraint is the restriction set by prices and income that limits the bundles of goods affordable to consumers.

Question 6

What is consumer equilibrium?

Answer 6

Consumer equilibrium is the consumption bundle that is affordable and yields the greatest satisfaction to the consumer.

Question 7

What happens to the budget constraint when income changes?

Answer 7

An increase in income shifts the budget constraint outward, allowing for more consumption, while a decrease in income shifts it inward.

Question 7

How do price changes affect consumer equilibrium?

Answer 7

Price changes alter the budget constraint and can lead to a new consumer equilibrium depending on whether the goods are substitutes or complements.