Chapter 6 - Consumer Behaviour Flashcards
What is utility?
Total satisfaction/enjoyment from goods and services
What is marginal utility?
Additional satisfaction from consuming one more unit of the same product
What is diminishing marginal utility?
Marginal utility falls as consumption rises
Give an example of the law of diminishing marginal utility
Burger
Total utility (inc/dec) with the amount consumed
Increases
Marginal utility (inc/dec) with the amount consumed
Decreases
What is the equation to maximizing MU?
MUx/Px = MUy/Py
Say a > b, how do you make the inequality equal?
Decrease a and increase b
What is the difference between nominal and real income?
Nominal: actual money
Real: in terms of purchasing power
When price changes, does this effect real or nominal?
Real
If the price of an apple increases from $4 to $5, what happens to your nominal income and does your PP increase or decrease?
Nominal stays the same, decrease
When price X increases, MUx/MUy < Px/Py, what occurs?
MU rises, increasing the ratio on the left
If the price of an apple decreases from $5 to $4, what happens to your nominal income and does your PP increase or decrease?
Nominal stays the same, increase
What is the substitution effect?
The good that now has a lower price becomes more attractive
What is the income effect?
If the price of the good is lower, the consumer becomes richer and can keep more income
When price decreases, substitution effect says to buy _
More
When price decreases, purchasing power (inc/dec)
Increases
If substitution effect > income effect
Buy more
If substitution effect < income effect
Buy less
When price decreases, income effect says to buy _ (if normal) and _ (if inferior)
More, less
Differentiate both effects on normal, inferior and giffen (inferior)
Normal: both effects work in same direction
Inferior: IE partially offsets SE
Giffen: IE dominates SE
What is special about the curve of a giffen good?
Upward sloping D curve
When wage increases and leisure is a normal good, what does substitution effect say?
The opp. cost of leisure increases and becomes less attractive
Work more, less leisure
When wage increases and leisure is a normal good, what does income effect say?
Work less, more leisure
