Download Consumer Theory and Budget Constraints: Terms and Definitions and more Quizzes Economics in PDF only on Docsity!
budget constraint
the budget constraint presents the combination of goods and services that the consumer can afford given his/her income and the price of the goods TERM 2
equation for budget constraint
DEFINITION 2 (Price x) * X + (Price y) * Y = I TERM 3
marginal rate of
substitution
DEFINITION 3 In economics, the marginal rate of substitution is the rate at which a consumer is ready to give up one good in exchange for another good while maintaining the same level of utility. TERM 4
utility
DEFINITION 4 numerical score representing the satisfaction that a consumer gets from a basket of goods/services TERM 5
ordinal
utility
DEFINITION 5 requires a ranking of goods in terms of consumer preferenceforms basis for consumer theory
what are the three basic steps to consumer
theory
- consumer preference2) budget constraints3) consumer choices TERM 7
market basket
DEFINITION 7 a list with specific quantities of one or more goods TERM 8
what is another term for a market basket
DEFINITION 8 bundle TERM 9
Give the four basic assumptions of
preferences
DEFINITION 9
- Completeness 2) Transitivity3) More is better than less (goods are desirable)4) Diminishing MRS TERM 10
transitivity
DEFINITION 10 preferences translate across goods, namely if consumers prefer bundle A over bundle B and prefer bundle C over bundle A, than consumers will prefer bundle C over bundle B.
explain perfect compliments indifference
curves
L- shaped TERM 17
give examples of
"bads"
DEFINITION 17 pollution and asbestos TERM 18
budget constraint
DEFINITION 18 A budget constraint represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income. TERM 19
what is the effect of increased income on a
budget line
DEFINITION 19 increased amount of goods bought; represented by parallel shift of the budget line to the right TERM 20
when is satisfaction maximized in a budget
constraint problem
DEFINITION 20 when MRS = P_x/ P_ymarginal benefit = marginal cost
equal marginal principle
principle that utility is maximized when the consumer has equalized the marginal utility per dollar of expenditure costMU_x / P_x = MU_y / P_y TERM 22
eleastic inelastic
isoelastic
DEFINITION 22 Relates Revenue = Price * Quantity SoldE >1 price goes up and quantity sold goes down moreE< 1 price goes up and quantity sold goes down less than that increaseE =1 price increase is equal to quantity decrease TERM 23
complements
DEFINITION 23 X and Y are complements if increase in Px leads to decrease of quantity demanded of y TERM 24
consumer surplus
DEFINITION 24 difference between what a consumer is willing to pay and what they actually pay
