CHAPTER 3 Flashcards
Quick Learn (39 cards)
What is the Law of Diminishing Marginal Utility?
The principle that as a consumer acquires additional units of a good, the satisfaction derived from each additional unit decreases.
This law explains why consumers may only purchase additional units of a product if its price falls.
Define Total Utility (TU).
The total amount of satisfaction a person derives from consuming a specific quantity of a good or service.
Total utility is subjective and can be difficult to quantify.
What is Marginal Utility (MU)?
The extra satisfaction a consumer realizes from consuming an additional unit of a product.
It is calculated as the change in total utility resulting from the consumption of one more unit.
What does the formula ΔTU/MU = ΔQ represent?
The relationship between the change in total utility and the change in quantity consumed.
It shows how marginal utility is derived.
What is Weighted Marginal Utility (WMU)?
The per-rand value of extra satisfaction derived from an additional unit of a product.
WMU is calculated as MU divided by the price of the product.
What is a Budget Constraint?
A limit on the consumption choices of a consumer based on their income and the prices of goods.
It indicates the combinations of goods that a consumer can afford.
What are Indifference Curves?
Curves that represent all combinations of two products that yield the same total satisfaction to a consumer.
They illustrate consumer preferences and trade-offs between goods.
How is the Demand Curve derived?
By observing consumer behavior and preferences as they respond to changes in price.
The demand curve typically slopes downward due to the law of diminishing marginal utility.
What is the concept of Utility Maximization?
The process by which consumers allocate their income to maximize total utility.
Consumers compare marginal utility to price ratios when making choices.
What are the Income and Substitution Effects?
The impacts that a change in the price of a product has on a consumer’s real income and the relative expensiveness of products.
These effects help explain changes in quantity demanded when prices fluctuate.
Fill in the blank: Consumers try to ________ their utility with the available income.
maximize
True or False: Total utility increases as more units of a good are consumed.
True
What happens to Marginal Utility as more units of a good are consumed?
It decreases.
What is the significance of the slope of the demand curve?
It indicates the inverse relationship between price and quantity demanded.
As price decreases, quantity demanded typically increases due to diminishing marginal utility.
What does a downward sloping demand curve imply?
Consumers are willing to buy more of a product as its price decreases.
What role do prices play in consumer choices?
Prices determine the affordability of goods and influence the quantity demanded.
A change in prices can shift the budget line and affect consumption decisions.
What is a Utility-maximizing combination of products?
The combination of products that maximizes total utility given a consumer’s budget.
This involves comparing marginal utilities per price and choosing accordingly.
Fill in the blank: The budget line shifts due to changes in ________ or prices.
income
What does the location of the budget line vary with?
Money income
The budget line shifts as a consumer’s income changes.
What effect do changes in product prices have on the budget line?
They shift the budget line.
What do indifference curves show?
Combinations of products A and B that yield the same total satisfaction or total utility.
What happens when a consumer is indifferent between combinations of products?
They will not care which combination is actually obtained.
Fill in the blank: The Law of Diminishing Marginal Utility states that more of one product means less of the other if total utility is to remain _______.
unchanged.
What is the shape of the demand curve according to the theory of consumer behavior?
Convex to the origin.
