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Flashcards in Demand - Consumer Behavior Deck (21):
1

Indifference Curves

Consumers' tastes (without regard to what they can afford)

2

Budget Lines

Consumers' Opportunities (without regard to his/her preference)

3

Marginal Rate of Substitution

Number of units of good y for which consumer is willing to trade on unit of good x (Posititve).

Slope of the indifference curve (Negative)

4

Marginal Rate of Substitution (Names)

Marginal Value (of a good in terms of the other)
Marginal Willingness to Pay (for a good in terms of the other)

5

Consumer's Choice

In optimum the consumer chooses the most preferred of the bundels which the consumer can afford. It's the best affordable bundle of consumption goods.

6

Tangency Condition

For "nice" indifference curves and budget lines: The bundle the consumer chooses (the optimal consumption bundle) will be located where her budget line is tangent to one of her indifference curves.

7

Normal Goods

Goods you consumer more when your income rises [xa --> xb]

8

Inferior Goods

Goods you consume less when your income rises [xa --> xc]

9

Income Consumption Curve

The set of consumption bundles for different levels of income. We construct the ICC by determining and connecting the optimal consumption bundle for all levels of income. The curve is in a coordinate system with good x and y on the respective axis.

10

Engel Curve

A curve showing, for fixed prices, the relationship between income and the quantity of a good consumed. It is used to represent the sensitivity of consumption to changes in money income.

11

Income Elasticity of Demand

The percent change in consumption that results from a 1% increase in income

12

Ordinary Goods

The quantity demanded x of ordinary goods decreases with price Px.

13

Giffen Goods

The quantity demanded x of Giffen goods increase with price increase Px.

14

Substitiution Effect

Indicates how the consumer "substitutes" one good for the other when a price changes but the consumer is (hypothetically) compensated for the price change (i.e. he is equally happy)

15

Income Effect

The change in consumption due to a change in income

16

Price Elasticity of Demand

The percent change in consumption that results from a 1% increase in price

17

Inelastic Demand

Consumers show little or no reaction to price changes --- steep demand curves

18

Elastic Demand

Consumers strongly react to price changes ---flat demand curves

19

Cross-Price Elasticity of Demand

The percent change in consumption of x that results from a 1% increase in the price of a related good (say y)

20

Substitutes

Goods for which the cross elasticity of demand is positive

21

Complements

Goods for which the cross elasticity of demand is negative