Topic 2 Flashcards
(29 cards)
What are the 5 axioms of consumer theory?
- Completeness
- Transitivity
- Continuity
- Monotonicity
- Convexity
These properties are expected for preferences to have.
Define Axiom 1 of consumer theory.
Completeness: all bundles can be compared.
Either bundle A is preferred to B or vice versa. Weak preference vs strict preference.
Define Axiom 2 of consumer theory.
Transitivity: all bundles can be ranked consistently.
If A is preferred to B, and B is preferred to C, then A is preferred to C.
Define Axiom 3 of consumer theory.
Continuity: similar bundles have similar rankings.
If A is strictly preferred to B and B is ‘close’ to C, then A is (weakly) preferred to C.
Define Axiom 4 of consumer theory.
Monotonicity: more is preferred to less.
If A has more of both goods than B, then A is strictly preferred to B.
Define Axiom 5 of consumer theory.
Convexity: averages preferred to extremes.
If A is indifferent to B and C is on a line connecting A and B, C is (weakly) preferred to A and B.
What is total utility?
A number assigned to a bundle summarizing their rank, often measured in utils.
Utility is an ordinal concept, meaning only ranking matters.
How do indifference curves represent preferences?
Indifference curves can be used to represent preferences based on Axiom 1, 2, and 3.
They indicate bundles that provide the same level of utility.
What does Axiom 4 imply about the shape of indifference curves?
Indifference curves are downward sloping.
This reflects the principle of monotonicity.
What is the implication of Axiom 5 on indifference curves?
Averages are preferred to extremes, leading to convex-shaped indifference curves.
This means combinations of goods are preferred over extremes of one good.
What does Axiom 2 imply about the behavior of indifference curves?
Indifference curves cannot cross.
This is because bundles can be consistently ranked.
What shape do indifference curves take for perfect substitutes?
Straight lines.
This indicates that the consumer is willing to substitute one good for another at a constant rate.
What shape do indifference curves take for perfect complements?
L shape.
This reflects that more utility is provided only when the goods are used together.
What are ‘bads’ in the context of utility?
Items that, when increased in quantity, lower utility (e.g., pollution).
They are the opposite of goods.
What is a bliss point?
The bundle with maximum possible utility.
Preferences are well behaved when little is consumed.
List properties of indifference curves.
- Indifference curves are made of bundles
- Join bundles for which a person receives the same total utility
- Any two differences cannot cross
- Further from origin, higher the utility
- Usually negatively sloped
These properties describe the behavior and characteristics of indifference curves.
What is a Giffen Good?
Special inferior good. Income and substitution effects work in opposite ways
Feasible Set
Consists of all affordable bundles
Engel Curve
Slope is linked to income elasticity of demand
Consumption-Leisure Model
Divide time between leisure and work
What happens to Consumption-Leisure model as wages rise?
Labour supply increases before reducing again at very high wages, causing a backwards bend
Poverty Trap
Poverty persists over generations. Can be caused by:
- Lack of capital
- Education and healthcare
- Disease
- Systematic failure
Determines buyer’s choice set
What they can afford: Income and price
Budget Constraint
Which bundles are available given income
