S1 - theory of behaviour

Question 1

what is consumer behaviour

Answer 1

consumer opportunities - set of goods they can afford to consume - budget constraints
Consumer preferences - set of goods that will be consumer - indifference curves

Question 2

what is diminishing marginal rate of substitution

Answer 2

more of good x means the amount of y willing to give up to get x decreases
Rate at which a consumer is willing to substitute one good for another and maintain level of satisfaction

Question 3

what are indifference curves

Answer 3

defines combination of two goods that give the same satisfaction
Higher is better
Slope downward and convex perfect substitutes are straight lines
Perfect complements are L shaped
Help explain individuals demand curves
Sum of all individuals = market demand curve

Question 4

what is budget constraint

Answer 4

Budget set: PxX + PyY < M
Budget line: PxX + PyY = M
shows affordable combinations of X and Y
Slope of -Px/Py reflects relative prices and represents market rate of substitution
Rate at which one good may be traded for another in the market - slope of budget line
budget increase causes parallel outward shift
Price change alters budget slope

Question 5

what is consumer equilibrium

Answer 5

consumption bundle that is affordable and yields the greatest satisfaction
Where the rate a consumer chooses to trade between goods x and y equals rate at which these goods are traded in the market
MRS = Px/Py
New equilibrium from price change depends on preferences: subs when price increase of x means more consumption of y, complements when increase in price of x means decrease in consumption of y