Chapter 6 - Consumer behaviour Flashcards Preview

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Flashcards in Chapter 6 - Consumer behaviour Deck (33)
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What motivates consumer

maximizing their utility


Utility def

Total satisfaction deriving from the goods and services consumed


Total utility def

Full satisfaction from the consumption of a product by a consumer


Marginal utility def

Additional satisfaction resulting from consuming one more unit of a product


Utility vs qt bought (consumed)

Utility of successive units of a product decreases as total consumption increases. MU falls as the level of consumption rises


shape of the utility ressembles which curve

shape of the demand curve


it terms of calculus, what is the marginal utility

slope of the total utility function


Theory of consumber behavior : individual demand shape and market demand shape

both negatively sloped


how consumers can maximize their utility

make sur that utility obtained from last dollar spent on each product is the same


2 ways of writing formula for maximal utility. What second one means

MUx/Px = MUy/Py or MUx/MUy = Px/Py


2 effects of a change in price

alters relative prices and changes consumer's real income


What is the substitution effect

effect that increases qt demanded of a good if relative price fell and reduces relative price of good if price increased


What is the income effect

price changed = my income changed
for a normal good, effect that leads consumers to buy more in price has fallen
for an inferior good, effect that leads consumers to buy less if price has fallen


Size of income effect what it depends on (2)

1) Amount of income spent on price changing product
2) How much price changed


Overall effect of price change on demand curve

Combination of substitution effect and income effect


what substitution effects tends to do on demand curve

increase qt demanded


what income effect tends to do on demand curve

increase qt demanded for a normal good. Decrease qt demanded for an inferior good


Normal good demand curve

Subs effect and income effect work in the same direction


Normal good demand curve : which is more important subs effect of income effect and why

Substitution effect. Income effect is small because the increase in purchasing power coming from income effect is low


Inferior good demand curve

Subs effect and income effect work in opposite directions but subs > income effect. steeper demand curve


Giffen good

Inferior good for which the demand curve is + sloped. income effect > subs effect


What is to remember about demand curves for normal, inferior and inferior Giffen good

Individual demand curves


Goods consumed for their snob appeal and status they confer -> why they do not violate theory of utility maximization ?

1) Consumers will buy more if price drops (as long as people think they paid the high price)
2) Very unlikely that the demand curve is positively sloped


On an individual demand curve, what is the surplus for a unit of product bought

for the q unit, the surplus is the price associated minus the price at which it's going to be bought


Utility vs surplus

Sum of prices we were willing to pay for each product q = utility. Sum of (prices we were willing to pay for each product q - price at which products were bought)


In general, what is the MU on the individual demand curve

Price of last unit bought (shows the value we give to this unit)


Value and utility

Synonyms (kind of)


2 ways of determining value placed by a consumer on total consumption of some product

1) Sum of valuations placed on each unit
2) How much consumer would pay if he was to buy all these units if alternative is none


What is the paradox of value

You can have invaluable goods at low prices (ex . water) and unneccesary goods at high prices (ex. diamonds)


Solution to paradox of value

Supply has to be taken into account -> will determine eq price