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23 Cards in this Set
- Front
- Back
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Assumptions made about consumers |
- consumers are rational - act in self interest - maximise utility - more is preferred to less |
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utility |
measure of satisfaction gained from the consumption of a good or service |
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total utility |
total level of satisfaction gained from the consumption of goods and services |
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marginal utility of consumption |
increase in satisfaction gained from the consumption of one extra good or service |
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diminishing utility of consumption |
tendency that sees a fall to marginal utility as you increase consumption of a good or service |
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budget constraint |
limit of consumption bundles that consumers can afford |
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budget constraint equation |
xPx + yPy = M x - number of good x Px - price of good x y - number of good y Py - price of good y M - income |
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relative price of the two goods |
- price of one good compared to the price of the other - slope of the budget equation |
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what causes a shift to the budget constraint |
change in income |
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what causes a change in the slope |
change in the price of the goods |
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indifference curve |
curve that shows the consumption bundles that give consumer same level of satisfaction |
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properties of indifference curves |
- higher indifference curves are preferred to lower ones - indifference curves are downward sloping - indifference curves are convex shaped - indifference curves don't cross |
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marginal rate of substitution (MRS) |
rate at which a consumer is willing to trade in one good for another |
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Straight line indifference curve |
- perfect substitutes - MRS is fixed |
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Right-angled indifference curve |
- perfect complements - MRS is zero |
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how to find consumer's optimal choice |
combine indifference curve and budget constraint |
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income effect |
change in consumption patterns as a result of increase purchasing power and a shift in the indifference curve |
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substitution effect |
change in consumption patterns resulting from a change in the relative price of goods, resulting to movement along the indifference curve and changing to a point with a different MRS |
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why is the indifference curve downward sloping? |
in order to maintain the same level of utility, if you need to increase X, you need to decrease Y |
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why is the indifference curve convex? |
MRS decreases as you move down the indifference curve |
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why doesn't the indifference curves cross? |
the combination of G&S at which they intersect represent two different levels of utility, which doesn't make sense |
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why are higher indifference curves preferred to lower? |
higher curves represent higher levels of satisfaction and more is preferred to less |
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formula for consumer optimum |
- slope of indifference curve = slope of the budget line - MRS = Px/Py |
