Term
| theory of consumer behavior |
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Definition
| description of how consumers allocate incomes among different goods and services to maximize their well-being |
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| List with specific quantities of one or more goods. consumers usually select bundles that make them as well off as possible. |
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Definition
curve representing all combinations of market baskets that provide a consumer with the same level of satisfaction
- cannot slope upward, since that would violate assumption that more of any commodity is preferred to less.
- thus... any market basket lying above and to the right of an indifference curve is preferred. |
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Term
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Definition
graph containing a set of indifference curves showing the market baskets among which a consumer is indifferent
*indifference curves cannot intersect. |
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Term
| marginal rate of substitution (MRS) |
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Definition
maximum amount of a good that a consumer is willing to give up in order to obtain one additional unit of another good.
- i.e. measures the value that the individual places on 1 extra unit of a good in terms of another.
- i.e. amount of good on vertical axis
- e.g. ∆clothing/∆food
* at any point is equal in magnitude to slope of the indifference curve |
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Definition
| two goods for which the marginal rate substitution of one for the other is a constant |
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| two goods for which the MRS is infinite; the indifference curves are shaped as right angles |
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Definition
| good for which less is preferred rather than more. |
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| numerical score representing the satisfaction that a consumer gets from a given market basket |
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Definition
a formula that assigns a level of utility to individual market baskets.
- provides same information about preferences as an indifference map (both order consumer choices in terms of levels of satisfaction)
- only a way of ranking baskets -- magnitude of utility difference does not really tell us anything |
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Definition
| utility function that generates a ranking of market baskets in order of most to least preferred |
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Term
| cardinal utility function |
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Definition
| utility function describing by how much one market basekt is preferred to another. |
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Definition
| constraints that consumers face as a result of limited incomes |
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Definition
all combinations of goods (say... F and C) for which the total amount of money spent is equal to income
PfF + PcC = I <- all combinations lie on this line
slope: -(Pf/Pc) <- ratio of the two prices
vertical intercept: I/Pc <- represents maximum amount of C that can be purchased with I
horizontal intercept: I/Pf |
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Definition
| benefit from the consumption of one additional unit of a good |
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Definition
| cost of one additional unit of a good |
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Definition
| situation in which the marginal rate of substitution for one good in a chosen market basket is not equal to the slope of the budget line |
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Definition
| additional satisfaction obtained from consuming one additional unit of a good. |
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Term
| diminishing marginal utility |
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Definition
| principle that as more of a good is consumed, the consumption of additional amounts will y ield smaller additions to utility |
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Term
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Definition
| principle that utility is maximized when the consumer has equalized the marginal utility per dollar of expenditure across all goods |
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Term
| 3 aspects of consumer behavior |
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Definition
1. consumer preferences (one product over another)
2. budget constraints (prices matter, and people have limited incomes)
3. consumer choices (maximizing satisfaction) -- helps explain demand |
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Term
| basic assumptions about preferences |
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Definition
1. completeness - consumers can compare and rank all possible baskets. people will either prefer A to B or B to A, or be indifferent (equally satisfied) between the two.
2. transitivity - if basket A is preferred to B and B to C, then A to C
3. more is better than less - plus.. consumers are never satiated. more is always better, even if just a little better. (ignore "bad" in this discussion, since people usually wont choose to purchase them) |
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Term
| slope of the indifference curve |
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Definition
| at any point is equal to MRS in magnitude |
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Term
| diminishing marginal rate of substitution |
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Definition
an indifference curve is convex if the MRS diminishes along the curve.
- expected because... as more and more of one good is consumed, consumer will prefer to give up fewer and fewer units of second good to get additional units of the first |
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Term
| what happens to the budget line when income changes? |
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Definition
alters the vertical intercept of the budget line but does not change the slope (since the price of neither good changes)
* i.e. it does not pivot... it moves out |
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| what happens to budget line if the price of one good changes but the price of the other does not? |
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Definition
the vertical intercept of the budget line does not change, but the slope does
it pivots |
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Term
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Definition
ability of a consumer to generate utility through the purchase of goods and services.
- determined by income and prices
example: a consumer's purchasing power can double because her income doubles *or* because the prices of all the goods she buys fall in half |
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Term
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Definition
-(Pf/Pc) <- ratio of the two prices
vertical intercept: I/Pc <- represents maximum amount of C that can be purchased with I
horizontal intercept: I/Pf |
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| how would inflationary conditions in which all prices and income levels rise proportionately affect a consumer's budget line or purchasing power? |
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Definition
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Term
| conditions of a maximizing market basket |
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Definition
1. it must be located on the budget line
2. it must give the consumer the most preferred combination of goods and services |
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Term
| satisfaction is maximized when... |
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Definition
the marginal rate of substitution (of F for C) is equal to the ratio of the prices (of F to C)
I.e. slope of indifference curve (MRS) equals slope of budget line |
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