Chapter 6: consumer behavior Flashcards
What is the difference between utility, total utility, and marginal utility?
How do consumers behave regarding utility?
Utility: The total satisfaction that a consumer can derive from the goods and services they consume
Total utility: the full satisfaction resulting from the consumption of some product by a consumer
Marginal utility: additional satisfaction resulting from consuming one more unit of some product
Consumers want to maximize utility
What is the law of diminishing utility?
You are hungry! Burger 1 gives lots of instant satisfaction
You are still kind of hungry. Burger 2 gives a bit more satisfaction
You are full! Burger 3 gives very little satisfaction
(marginal utility falls as level of consumption rises)
How are the graphs of Total utility / quantity and Marginal utility / quantity related?
Marginal utility is the slope of total utility
What are the constraints consumers face impeding them from maximizing utility?
Their income and market price
How does a utility-maximizing consumer allocate expenditures?
In a way such that marginal utility obtained from the last dollar spent on each product is equal
How do you calculate maximized marginal utility of two goods in relation to their price?
MU(x)/p(x) = MU(y)/p(y)
or
MU(x)/MU(y) = p(x)/p(y)
Let’s say you have two goods which have their utility maximized. What happens when the price of one good increases?
MU(x)/MU(y) < p(x)/p(y)
X is more expensive, so you buy less of it. As consumption of X decreases, marginal utility rises, balancing the ratio on the left hand side of the equation
MU(x)/MU(y) = p(x)/p(y)
What does the theory of consumer behavior predict for the slope of a market demand curve? What about for each individual consumer?
Both negative curves
What are the two distinct effects of a price change?
A change in relative price, and real income
What is real income?
Income expressed in terms of the purchasing power of money income
Or, the quantity of goods and services that can be purchased with the money income
What is the substitution effect?
The good that now has a lower price becomes more attractive
Increases the quantity demanded of a good whose relative price has fallen, and reduces the quantity demanded of a good whose relative price has increased
What is the income effect?
The price of the good is lower, the consumer becomes “richer”, and can keep more income (real income increases)
For a normal good, the income effect leads consumers to buy more of a product that has fallen in price
For an inferior good, the income effect leads consumers to buy less of a product that has fallen in price
What is a Giffen good?
An inferior good whose income effect outweighs the substitution effect, resulting in a decrease in price leading to a decrease in demand
If one hour of work earns you $w, what is the opportunity cost of one hour of leisure?
$w
What kind of consumption good is leisure?
Normal
