Intro Microecon: Chap 6 - Consumer Choice

Front 1

Budget constraint

Back 1

The different combination of goods a consumer can afford with a limited budget, at given prices

Front 2

Budget line

Back 2

The graphical representation of a budget constraint, showing the maximum affordable quantity of one good for given amounts of another good

(The slope of the budget line indicate the spending tradeoff between one good and another)

Front 3

Relative price

Back 3

The price of one good relative to the price of another.

Front 4

Causes of changes in the budget line

Back 4

Change in income
-income up, budget line shifts up and to the right.

Changes in price
-budget line rotates: slope & one of its intercepts change

Front 5

Rational preferences

Back 5

Preferences that satisfy 2 conditions:
1) one is preferred or else both goods are valued equally
2) the comparisons are logically consistent or transitive

(a matter of how you make choices, not the choices you make)

Front 6

"More is Better"

Back 6

The consumer will always choose a point on the budget line, rather than a point below it

(we'll choose point with the highest level of satisfaction/utility)

Front 7

The two approaches to consumer theory

Back 7

Both are models(use graphs and calculations)
1)Marginal Utility Approach
2)Indifference Curve Approach

Front 8

Utility

Back 8

A quantitative measure of satisfaction obtained from consuming goods and services

Front 9

Marginal utility

Back 9

The change in total utility obtained from consuming an additional unit of a good or service

Front 10

Law of diminishing marginal utility

Back 10

The marginal utility of a thing to anyone diminishes with every increase in the amount of it he already has/had

Front 11

Calculating marginal utility

Back 11

(Marginal utility from last consumption)/(Dollar spent on last consumption)

Front 12

Consumer's decision based on marginal utility

Back 12

Consumer will choose the point on the budget line where marginal utility per dollar is the same for both goods

Front 13

What is the behavior of the consumer faced with tradeoffs when income changes?

Back 13

Utility-maximizing rule:
Demand shifts and new point where marginal utility for both good are the same

Front 14

What is the behavior of the consumer faced with tradeoffs when price changes?

Back 14

Budget line will rotate upward. The consumer will select the combination where marginal utility for both good are the same

Front 15

Substitution effect

Back 15

as the price of a good falls, the consumer substitutes that good in place of other goods who prices have not changed

Front 16

Income effect

Back 16

As the price of a good decreases, the consumer's purchasing power increases, causing a change in quantity demanded for the good

Front 17

The market demand curve

Back 17

found by horrizontally summing the individual demand curves of every consumer in the market

Front 18

Behavioral economics

Back 18

A subfield of economics focusing on decidsion-making patterns that deviate from those predicted by traditional consumer theory

Front 19

Irrational behavior: Salience

Back 19

striking, what "jumps up at you"
(colorful package, pricetags)Sallience may evoke irrational consumer behavior