Econ 100A: Preferences, Constraints, and Choice

This flashcard set is designed to help students review key terms and concepts from the Econ 100A lecture on Preferences, Constraints, and Choice.

Consumer choice model

A framework to understand how consumers make decisions based on their preferences and constraints.

Utility

A numeric representation of the satisfaction or happiness derived from a bundle of goods.

Bundle

A collection of goods represented as quantities of each type (e.g., (x1, x2)).

MRS (Marginal Rate of Substitution)

The rate at which a consumer is willing to give up good 2 to obtain more of good 1, keeping utility constant.

Preferences

An ordering of bundles based on a consumer’s liking and satisfaction.

Completeness

A property of preferences ensuring that for any two bundles, a consumer can determine which they prefer or if they are indifferent.

Transitivity

A property of preferences where if a consumer prefers x to y and y to z, then they must prefer x to z.

Indifference curve

A curve that connects all bundles providing the same level of utility, demonstrating consumer indifference.

Convexity

A property of preferences indicating that average bundles are preferable to extreme ones.

Monotonicity

The assumption that more of a good is always better than less, leading to a preference for larger bundles.

Budget constraint

An inequality representing the combinations of goods that a consumer can afford given their income and the prices of the goods.

Optimal choice

The selection of a bundle of goods that maximizes utility within the given budget constraint.

Utility representation theorem

States that preferences satisfying completeness and transitivity can be represented by a utility function.

Independence of irrelevant alternatives

The principle that the choice between options should not be affected by options that are not chosen.

Weak axiom of revealed preference (WARP)

If a consumer chooses x over y when both are available, y should not be chosen over x in any other set containing both.

Cobb-Douglas utility function

A functional form representing utility as a product of quantities of two goods, u = x1^c * x2^d.

Marginal utility

The additional utility gained from consuming one more unit of a good.

Diminishing MRS

As a consumer has more of good 1, the amount of good 2 they are willing to give up for an additional unit of good 1 decreases.

Substitutes

Goods that can replace each other; an increase in the price of one can lead to an increase in the demand for another.

Complements

Goods that are consumed together; an increase in the price of one can lead to a decrease in the demand for another.

Optimal consumption bundle

The combination of goods that maximizes utility for a given budget.

Price ratio

The rate at which one good can be exchanged for another, determined by their prices.

Budget set

The set of all possible bundles a consumer can afford with their income.

Slope of the budget line

Represents the market rate of exchange between two goods; the opportunity cost of one good in terms of another.

Direct utility

Utilizes preferences directly to calculate utility based on consumption choices.

Indirect utility

Utility derived from the optimal bundle given prices and income.

Consumer demand

The quantity of a good that consumers are willing and able to purchase at different prices.

Utility maximization problem

The mathematical problem of maximizing utility subject to budget constraints.

Graphical analysis

Using graphical representations to visualize consumer choice, showing preferences and budget constraints.

Goods distribution

How goods are allocated between different consumption options.

Preference ordering

The ranking of different bundles based on consumer preference.

Utility function

A mathematical function that defines the relationship between utility and commodity consumption.

Trade-off

The balance between different goods when making a choice, especially given limited resources.

Inflexibility in budget constraints

The assumption that prices are fixed and not dependent on quantities bought.

Optimal consumption choice

The point where the consumer maximizes utility subject to their budget constraint.

Budget line

A graphical representation of the budget constraint, showing all affordable bundles.

Cardinal utility

Utility measured in absolute numbers, which conveys the intensity of preferences.

Ordinal utility

Utility measured by the order of preferences rather than absolute numbers.

Consumer surplus

The difference between what consumers are willing to pay and what they actually pay.

Producer surplus

The difference between what producers are willing to accept for a good and the actual price they receive.

Market equilibrium

The point where supply equals demand, resulting in stable prices.

Demand curve

A graph showing the relationship between the price of a good and the quantity demanded.

Supply curve

A graph showing the relationship between the price of a good and the quantity supplied.

Equilibrium price

The price at which the quantity of a good demanded equals the quantity supplied.

Exogenous changes

Factors that affect supply and demand from outside the market.

Endogenous variables

Factors that are determined within the economic model.

Marginal rate

The rate of change in utility or output with respect to a change in resources.

Satisfice

Choosing an option that meets acceptable criteria rather than the optimal choice.

Choice architecture

The design of different ways in which choices can be presented to consumers.

Utility maximization

The aim of consumers to achieve the highest possible satisfaction from their choices.