consumer theory Flashcards
(26 cards)
utility
the pleasure or satisfaction one gets from a product
is subjective
marginal utility
-Extra satisfaction a consumer realises from an additional unit of that product
-decreases as consumption increases
(plotted at halfway points)
can become negative (@ and past max point of TU where TU starts decreasing)
measuring utility
cardinal : quantify untility into units- utils
ordinal: not quantifiable
Law of diminishing marginal utility
As consumers consumes more of a product, the MU decreases
total utility
- Total amount of satisfaction/pleasure a person derives from consuming some specific quantity of a good or service
-increases at a decreasing rate
-can decrease (when overconsumption)
theory of consumer behaviour
rational behaviour (consumer wants to maximise utility)
preferences (consumers knows what they want and know how much MU they will get from successive units)
budget constraints (limited income + prices of products)
budget management (full budget used up)
prices (not influenced by individual buyer
purchase decisions
- look @MU per rand of each product
choose product w larger MU and buy 1 unit
choose product w second largest MU and buy
continue till budget exhausted
utility maximising position
MUa /Pa = MUb/Pb
the last rand spent on each product yields the same MU
and budget exhausted
paradox of value
Adam Smith
Water has much total utility, but because its abundant, low marginal utility
Diamonds have little total utility , but because they are scarce, they have high marginal utility
indifference curve
same utility at every point on curve
quantities on x axis
“indifferent between combos)
downward sloping, to increase the quantity of one thing i have to give up something else
cant cross each other (proof)
Want to be on highest possible/most right IC
cardinal graph
utility on y axis
quantity on x axis
MRS
marginal rate of substitution
why IC are convex w/ respect to origin
rate at which a consumer is willing to substitute one good for another (from a given combination of goods) and remain equally satisfied (have the same total utility); equal to the slope of a consumer’s indifference curve at each point on the curve.
= Qauntity Y/Quantity X
less MRS- flatter IC
greater MRS- steeper IC
budget line
line showing various combos of 2 products consumer can purchase w a specific income
axis intercepts- whole budget spent on either
slope= - PriceX/PriceY
slope = opportunity cost, ratio of prices=rate at which you can trade one good for the other in the marketplace.
QY? left over money/Py
where left over money = budget - QxPx
attainable
all combos on or inside BL are attainable
inside- not max utility, must be on BL
beyond BL- unattainable
budget line movements
income change:
increase-parallel shift right
decrease-parallel shift left
Price of one changes:
pivot budget line
opportunity cost changes: product becomes cheaper, opportunity cost of other becomes greater
consumer eqm
@ POI of BL and IC
optimal IC- curve forms tangent to BL
slope IC=slope BL
therefore MRS=Opportunity cost
the rate at which the consumer is willing to give up product Y for one extra unit of X (MRS) is = to the number of units of Y given up for one unit of X (OC)
price of product x decreases
x becomes relatively cheaper than Y (substitution effect) and product y by implication becomes more expensive
the real income (purchasing power) of the consumer increases (income effect)
total effect
B-A
total before and afterr
income effect
B-C
Big cheques
substitution effect
C-A
change appetite
disentangle effect
og eqm A
point on new BL b
take new budget line after price increase and bring it to tangent to IC, parallel to new BL
label new eqm C
total A-B
income
C-B
substitution
C-A
get to utility eqm point
cant change prices
can increase or decrease MU’s by changing consumption
increase MU of A
decrease consumption of A
(price a increases, quantity demanded of A decreases)
decrease MU=of B
increase consumption of B
(price b decreases, quantity demanded of B increases)
