Midterm - Lectures 1-7 Flashcards
(150 cards)
Consumer’s Choice
Every point on a plane is a bundle that the consumer could buy
What are the two steps to consumer choice?
1) What bundles can the consumer afford? (Establish the budget set)
2) Of the bundles the consumer can afford, which does she prefer? (Create utility function)
Budget Set
(PQ1)+(PQ2)
What is a utility function?
a rule assigning numbers to bundles such that if x is preferred to y, U(x)>U(y) where U= utility function.
What do utility functions NOT take into account?
magnitude
What is an indifference curve?
Its a curve where all the bundle combinations have the same utility
What are the assumptions of indifference curves?
Assumes a rational consumer, and it assumes that prferences (and thus indifference curves) do not change.
Even though along a given indifference curve we are indiffiernt, what indifference curve do we always prefer?
The one farthest from the origin that is still on our budget set; is tanglet to the budget set.
What do we aim to achieve in our budget set choice?
we aim to maximize utility - aka aim for constrained maximization
What is the peltzman effect?
when people adjust their behavior to a regulation in a way that counteracts its intended effect.
It may not completely erase the effect, but it could reduce its impact.
In the budget set, what happens if the price of one item changes?
her budget set - and thus choice - will shift, even though her indifference curves (and thus preferences) do not change… you have to maximize your utility based upon your constraints.
Crowd out
When governmental intervention crowds out the private purchase of goods. It involves consumers switching from privately purchased goods to publically purchased goods.
What must policy makers budget for concerning crowd out?
Policy makers must budget for individuals who will opt into government programs due to crowd out - this makes governmental programs expensive.
Opportunity Cost
The value of the next forgone alternative use (the next best use of that resource).
“On the margin”
At each “Unit” or increment there is a decision whether or not to consume based upon the benefit/cost to you.
its the point at which you become indifferent/determine overconsumption
Competitive Market
Many consumers and many producers who are price takers
Law of demand
if price increases then consumption decreases (downward sloping).
If people are richer, shift right
If people are poorer shift left.
How do you get a market demand curve?
Take individual demand curves and aggregate them up to the market demand curve –> its summed consumption vs price added horizontally.
A competitve Firm is 2 things
a price taker
a profit maximizer
Profit =
(pricequantity) - (costquantity)
Fixed costs
are independent of quantity produced
Variable costs
change based upon the quanitity produced
Average costs
total costs/quantity produced
i.e. the more units, the smaller the cost per unit
Marginal Costs:
The additional cost of producing onem ore unit - isnt necessarily linear.
Firms want to maximize profits at the margin - they will continue to produce until price = marginal cost, at which point the cost would be greater than the price to produce the next item, and the firm would lose money