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19 Cards in this Set
- Front
- Back
Budget constraint
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The different combination of goods a consumer can afford with a limited budget, at given prices
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Budget line
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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) |
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Relative price
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The price of one good relative to the price of another.
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Causes of changes in the budget line
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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 |
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Rational preferences
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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) |
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"More is Better"
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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) |
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The two approaches to consumer theory
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Both are models(use graphs and calculations)
1)Marginal Utility Approach 2)Indifference Curve Approach |
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Utility
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A quantitative measure of satisfaction obtained from consuming goods and services
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Marginal utility
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The change in total utility obtained from consuming an additional unit of a good or service
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Law of diminishing marginal utility
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The marginal utility of a thing to anyone diminishes with every increase in the amount of it he already has/had
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Calculating marginal utility
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(Marginal utility from last consumption)/(Dollar spent on last consumption)
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Consumer's decision based on marginal utility
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Consumer will choose the point on the budget line where marginal utility per dollar is the same for both goods
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What is the behavior of the consumer faced with tradeoffs when income changes?
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Utility-maximizing rule:
Demand shifts and new point where marginal utility for both good are the same |
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What is the behavior of the consumer faced with tradeoffs when price changes?
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Budget line will rotate upward. The consumer will select the combination where marginal utility for both good are the same
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Substitution effect
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as the price of a good falls, the consumer substitutes that good in place of other goods who prices have not changed
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Income effect
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As the price of a good decreases, the consumer's purchasing power increases, causing a change in quantity demanded for the good
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The market demand curve
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found by horrizontally summing the individual demand curves of every consumer in the market
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Behavioral economics
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A subfield of economics focusing on decidsion-making patterns that deviate from those predicted by traditional consumer theory
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Irrational behavior: Salience
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striking, what "jumps up at you"
(colorful package, pricetags)Sallience may evoke irrational consumer behavior |