Flashcards in Demand and Supply Analysis: Consumer Demand Deck (10):
Consumer choice theory
Branch of micro relating consumer demand curves to consumer preferences (willingness to trade off between goods)
Consumer knows his preferences and acts rationally to obtain preferred consumption bundle
Describe use of indifference curves in decision making
All combinations of two goods such that consumer is indifferent among options
Describe use of opportunity sets in decision making
Graph preferences based on different opportunities that are available.
Describe use of budget constraints in decision making
Calculate zero of each good for axis intercepts, connect line for slope (rise over run)
Calculate/interpret budget constraint
Quantity of X times Price of X + QyPy . . . < Budget
Determine consumer's equilibrium bundle of goods based on utility analysis
MRS(xy) equals Px/Py
Compare substitution and income effects
If good declines in price, it is substituted more for other goods in the basket. Consumer's income also can buy more goods than previously.
Distinguish between normal and inferior goods; explain Giffen and Veblen goods
Inferior goods people buy less of when price decreases, normal goods people buy more of with price decrease. Giffen good is inferior with income effect greater than substitution effect. Veblen good is something people buy more of when price increases (conspicuous consumption).