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41 Cards in this Set
- Front
- Back
Choices made as a buyer of goods and services is influenced by two factors that economists call? |
1) Consumption possibilities 2) Preferences |
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Consumption possibilities |
Are all the things that you can afford to buy. |
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Consumers budget line |
-consumption possibilities are limited by income, the price of a movie, and the price of pop. -lisa spends all income = reaches limits of her consumption possibilities -budget line shows the limits of her consumption possibilities |
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Example of budget line |
- Lisa has $40 - income to spend price of a movie is $8, and price of a pop is $4 a case -Can afford any points A to F -budjet line is what runs through all these pints |
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Preferences |
The choices that lisa makes depends of her preferences (likes and dislikes) |
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Utility |
Benefit or satisfaction from consuming a good or service is called utility. |
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Total utility |
is the total benefit a person gets from the consumption of goods. More consumption gives more total utility -total utility of a good increases as the quantity of the good increases -Ex, lisa sees more movies in a month, her total utility for movies increases |
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Marginal utility |
from a good is the change in total utility that results from a unit increase in the quantity of the good consumed. -as quantity consumed of a good increases, the marginal utility from it decreases. -decrease in marginal utility as the quantity of the good consumed increases is called the principle of diminishing marginal utility. |
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Maximizing utility |
-marginal utility decreases as the quantity of the good increases. - ex. as the number of movies seen in a month increases marginal utility from movies decreases. |
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Marginal utility |
from a good is the change in total utility that results from a unit increase in the quantity of the good consumed. -Decreases as the quantity of the good increases. |
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Diminishing marginal utility |
-lisa increases the quantity of pop she drinks -her marginal utility from pop diminishes Utility decreased, Quantity increases |
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Uitlity maximizing choice |
-household does not always choose the consumption possibility that maximizes utility. |
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How to maximize utility |
1) just affordable combinations - find total utility for each just affordable combo 2) find total utility (for each just affordable combo) 3) utility maximizing combination = consumers choice |
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Consumer equilibrium |
is the situation in which Lisa has allocated all of her available income in a way that maximizes her total utility. (where ever the highest total utility column is on the table) |
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marginal utility per dollar |
results from spending on more dollar on the good. |
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MUPD equation |
MUPD (Marginal utility per dollar) = MU / P or (marginal utility) / (price) |
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Utility maximizing rule |
1) spend all available income 2) equalize the marginal utility per dollar for all goods. |
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How to equalize: |
start by picking one point on the budget line ex. MUp /Pp < MUm / Pm Above the consumer equilibrium will be equal to too much and below the consumer equilibrium will be too little |
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Predictions of marginal utility theory analyze |
1) Fall in the price of a good (ex. good x) 2) a rise in the price of pop (good y) 3) Rise in income |
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fall in price of good (ex. good x) |
-results in the quantity demanded of the good to increase -the curve will slope downwards - increase amount of movies seen to drive up utility and restore balance (results in a downwards shift along the demand curve and a shift of the demand curve to the left) |
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rise in the price of pop - good y |
-decreases the quantity of pop demanded -upwards movement along the demand curve |
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rise in income - Y |
income increases, demand for a normal good increases too. -ex. lists income increases from $40-$56 a month she will buy more movies and pop -because they are normal (shift to the right on the demand curve due to income increase) |
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paradox of value |
MU for water = low total utility = high MU for diamonds = high total utility = low |
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Paradox resolved |
by distinguishing total vs. marginal utility -marginal utility per dollar is the same for water and diamonds |
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value and consumer surplus |
Supply of water = perfectly elastic -quantity consumed is large + surplus (consumer) is large (surplus of water is large because there is a large amount available to us) |
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DIamonds consumer surplus |
perfectly elastic supply of diamonds (vertical line) - because of its low quantity |
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temperature -> utiltiy |
- both are abstract concepts -both use a unit of measurement that is arbitrary (made up based on the belief of many individuals) -temp helps predict when water will turn to steam (etc) - utility help us understand why people buy more of one good for many reasons |
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behavioural economic |
studies the way in which limits on the humans brain ability to compute/implement rational decision - influences economic behaviour |
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3 impediments to rational choice |
1) bounded rationality 2) bounded willpower 3) bounded self interest |
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bounded rationality |
bound by computing power of the humans brain |
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bounded willpower |
less than perfect willpower that prevents us from making decision we know we will later regret |
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bounded self interest |
limited self interest that sometimes results in suppressing our own interests to help others |
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endowment effect |
tendency for people to value something more high simply because they won it |
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neuroeconomics |
study of activity of the human brain when a person makes an economic decision -pre forntal cortex - memories are stored (deemed rational) - hippocampus - memories of anxiety and fear are stores (deemed irrational) |
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household consumption choices are constrained by... |
its income and the prices of the goods and services available |
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budget line |
describes the limits to the households consumption choices |
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consumption possibilities |
lisa can afford any of the combinations at points A-F -some goods are indivisible and must be bought in whole units at the points markers -other goods are divisible and can be bought in any quantity such as gasoline |
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budget line (on graph) |
(all points a-f are affordable, and within the budget line so under it are also affordable options) |
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budget equation |
the budget equation states that expenditure = income PpQp + PmQm = Y (income) |
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a households real income |
goods a household can afford to buy -real income in terms of pop is the point on the budget line that meets the y axis (opposite in terms of movies) |
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relative price |
price of a good divided by the price of another good -magnitude of the slope of the budget line (how many case forgone to see an addition movie - also opportunity price) |