[MICRO] 03 - Consumer Behaviour and Choice Flashcards
Definition: Perfect Competition
An industry structure in which there are many firms, each small relative to the industry and producing virtually identical products, and in which no firm is large enough to have any control over prices.
Assumptions Perfect competition (5)
1) All firms sell an identical product
2) All firms are price takers - they cannot control the market price of their product
3) All firms have a relatively small market share
4) Buyers have complete information about the product being sold and the prices charged by each firm
5) The industry is characterized by freedom of entry and exit.
3 Basic Decisions of Households
1) How much of each product to demand
2) How much labor to supply
3) How much to spend today and how much to save for the future
Definition: Budget Constraint
The limits imposed on household choices by income, wealth, and product prices.
Definition: Choice Set/Opportunity Set
The set of options that is defined and limited by a budget constraint.
Definition: Utility
The satisfaction, or reward, a product yields relative to its alternatives.
Definition: Marginal Utility
The additional satisfaction gained by the consumption or use of one more unit of something
Definition: Total Utility
The sum of satisfaction obtained from consumption of a good or service.
Law of Diminishing Marginal Utility
The more of any one good consumed in a given periode, the less utility generated by consuming each marginal unit of the same good.
Definition: Indifference Curve
A set of points, each representing a combination of goods X and Y, all of which yield the same total utility. It is drawn as a convex curve due to the law of diminishing marginal utility. It tells a simple story: If I start consuming less of good X, I will consume more of good Y to achieve maximum utility and vice versa.
Definition: Preference Map
A collection of indifference curves, used to determine the preference of consumers.
