Econ Exam Prt 2

Front 1

Choices made as a buyer of goods and services is influenced by two factors that economists call?

Back 1

1) Consumption possibilities

2) Preferences

Front 2

Consumption possibilities

Back 2

Are all the things that you can afford to buy.

Front 3

Consumers budget line

Back 3

-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

Front 4

Example of budget line

Back 4

- 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

Front 5

Preferences

Back 5

The choices that lisa makes depends of her preferences (likes and dislikes)

Front 6

Utility

Back 6

Benefit or satisfaction from consuming a good or service is called utility.

Front 7

Total utility

Back 7

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

Front 8

Marginal utility

Back 8

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.

Front 9

Maximizing utility

Back 9

-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.

Front 10

Marginal utility

Back 10

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.

Front 11

Diminishing marginal utility

Back 11

-lisa increases the quantity of pop she drinks

-her marginal utility from pop diminishes

Utility decreased, Quantity increases

Front 12

Uitlity maximizing choice

Back 12

-household does not always choose the consumption possibility that maximizes utility.

Front 13

How to maximize utility

Back 13

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

Front 14

Consumer equilibrium

Back 14

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)

Front 15

marginal utility per dollar

Back 15

results from spending on more dollar on the good.

Front 16

MUPD equation

Back 16

MUPD (Marginal utility per dollar) = MU / P or (marginal utility) / (price)

Front 17

Utility maximizing rule

Back 17

1) spend all available income

2) equalize the marginal utility per dollar for all goods.

Front 18

How to equalize:

Back 18

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

Front 19

Predictions of marginal utility theory analyze

Back 19

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

Front 20

fall in price of good (ex. good x)

Back 20

-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)

Front 21

rise in the price of pop - good y

Back 21

-decreases the quantity of pop demanded

-upwards movement along the demand curve

Front 22

rise in income - Y

Back 22

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)

Front 23

paradox of value

Back 23

MU for water = low

total utility = high

MU for diamonds = high

total utility = low

Front 24

Paradox resolved

Back 24

by distinguishing total vs. marginal utility

-marginal utility per dollar is the same for water and diamonds

Front 25

value and consumer surplus

Back 25

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)

Front 26

DIamonds consumer surplus

Back 26

perfectly elastic supply of diamonds (vertical line) - because of its low quantity

Front 27

temperature -> utiltiy

Back 27

- 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

Front 28

behavioural economic

Back 28

studies the way in which limits on the humans brain ability to compute/implement rational decision - influences economic behaviour

Front 29

3 impediments to rational choice

Back 29

1) bounded rationality

2) bounded willpower

3) bounded self interest

Front 30

bounded rationality

Back 30

bound by computing power of the humans brain

Front 31

bounded willpower

Back 31

less than perfect willpower that prevents us from making decision we know we will later regret

Front 32

bounded self interest

Back 32

limited self interest that sometimes results in suppressing our own interests to help others

Front 33

endowment effect

Back 33

tendency for people to value something more high simply because they won it

Front 34

neuroeconomics

Back 34

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)

Front 35

household consumption choices are constrained by...

Back 35

its income and the prices of the goods and services available

Front 36

budget line

Back 36

describes the limits to the households consumption choices

Front 37

consumption possibilities

Back 37

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

Front 38

budget line (on graph)

Back 38

(all points a-f are affordable, and within the budget line so under it are also affordable options)

Front 39

budget equation

Back 39

the budget equation states that

expenditure = income

PpQp + PmQm = Y (income)

Front 40

a households real income

Back 40

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)

Front 41

relative price

Back 41

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)