Chapter 6 Midterm 2 Flashcards
total utility vs marginal utility
total utility: the total satisfaction from consumption of a product
Marginal Utility: the ADDITIONAL satisfaction from consuming ONE MORE of that product
ex: the marginal utility of the first cigarette of the day is greater than the 5th, because it feels best
but the total utility of the of the 5th is greater than the first because you’ve smoked more
in this sense they are negatively correlated graphs
how can a consumer maximize their utility?
if utility from last dollar spent on beers is greater than the last dollar spent on cigarettes;
you can increase utility by spending more money on beer and less money on cigarettes, thus heading towards maximization.
utility maximization formula (MUx)
Which formula is used for demand curve of product?
MUx/Px = MUy/Py
OR
MUx/MUy = Px/Py
(for relative ability, and relative price)
rise of price in a product leads each utility-maximizing consumer to _______?
reduce the quantity DEMANDED of the product.
What are market demand curves?
What relationship do they reveal?
- horizontal sum of each individual demand curve within a market
- relationship between the product’s price and the quantity demanded by all consumers together.
how does the substitution effect affect demand and price
substitution effect:
price ↓, Quantity demanded ↑
and inverse
What is the income effect and what does it do to affect consumption
it is an increase in purchasing power that tends to have consumers buying more of the normal goods they like, but generally just increases their income
Holding relative prices constant at their new value
the income effect leads consumers to buy more of a product whose price has fallen (normal goods only)
Slope of Demand curve which direction is the slope of a demand curve for a normal good?
demand curve will be negatively sloped
and so a fall in price means increase in QD
Slope of Demand curve which direction is the slope of a demand curve for an INFERIOR good?
typically negatively sloped UNLESS income effect outweighs the subsitution effect
An overal increase in income means less willingness to buy shittier goods
What is a GIFFEN good? (Sir Robert Giffen)
inferior good that makes up a lot of household expenditure (bread in recessions)
What is consumer surplus?
difference between total value consumers place on all units consumed and the payment they actually make to purchase it.
It is the consumers “profit” from their purchase
how does one measure Consumer surplus next to the market price?
consumer surplus = market price - max price a consumer is willing to spend on that product
how does one measure Consumer surplus in regards to units consumed?
conumer surplus = max amount a consumer will spend for the product - the price they actually payed for it
Where is TCS (total consumer surplus) on a graph
under the demand curve and above the price line
paradox of value?
supply has just as much importance as demand does in influencing price; that’s why diamonds are less useful than water but far more valuable price wise
