Theory of Consumer Behavior Flashcards
It shows the various bundles of goods that the consumer can buy for a given income
Budget Constraint
The slope of the budget constraint equals?
The relative price of the two goods (ex: pizza costs 5 times as Pepsi; therefore the opportunity cost of one pizza is 5 liters of Pepsi)
An indifference curve shows?
The various bundles of consumption that make the consumer equally happy
The rate at which the consumer is willing to substitute one good for the other
Marginal Rate of Substitution
Four Properties of Indifference Curves
- Higher indifference curves are preferred than lower ones.
- Indifference curves are downward-sloping
- Indifference curves DO NOT cross
- Indifference curves are bowed inward
The slope of an indifference curve is…
the marginal rate of substitution
When goods are easy to substitute…
Indifference curves are less bowed
When goods are hard to substitute
Indifference curves are very bowed
Two goods with straight-line indifference curves
Perfect Substitutes
Two goods with right-angle indifference curves
Perfect Compliments
The point at which the indifference curve and the budget constraint touch is the…
Optimum
It means that the Marginal Rate of Substitution equals the relative price of the two goods
Optimum
The rate at which the market is willing to trade one good for another
Relative Price
What happens at the consumer’s optimum
The consumer’s valuation of the two goods EQUALS the market’s valuation of the two goods
A good in which an increase in income raises the quantity demanded
Normal Good
A good in which an increase in income decreases the quantity demanded
Inferior Good
Change in consumption that results when a price change moves the consumer to a higher or lower indifference curve
Income Effect (both tataas)
Change in consumption that results when a price change moves the consumer along a given indifference curve to a point with a new marginal rate of substitution
Substitution Effect (tataas yung isa tapos bababa yung isa)
A good for which an increase in the price raises the quantity demanded
Giffen Good
The assumption that households possess a knowledge of the qualities and prices of everything in the market and that firms have all available information concerning wage rates, capital costs, and output prices.
Perfect Knowledge
3 basic decisions in a household
- How much of each product, or output, to demand
- How much labor to supply
- How much to spend today and how much to save for the future
Determinants of Household Demand (6)
- Price of a product
- Income available to the household
- The household’s amount of accumulated wealth
- Prices of other products available to the household
- The household’s tastes and preferences
- The household’s expectations about future income, wealth, and prices
set of opportunities to purchase real goods and services available to a household as determined by prices and money income
Real Income
When the price of a good decreases
the budget constraint swivels to the right
The satisfaction or reward a product yields relative to alternatives
Utility
Additional satisfaction gained by the consumption of one more unit of something
Marginal Utility
Total amount of satisfaction from consumption
total utility
the more of one good consumed, the less utility
Law of diminishing marginal utility
Equating the ratio of the marginal utility of a good to its price for all goods
Utility-Maximizing rule
Households face constrained choices in input markets. They must decide (3)
- Whether to work
- How much to work
- What kind of job to work at
Choices of household on how much labor to supply are affected by (3)
- Availability of jobs
- Market Wage Rates
- Skills they posses
a complex set of institutions in which suppliers of capital and the demand for capital interact
financial capital market
