Consumer Equilibrium and Demand

Vocabulary flashcards covering foundational principles of consumer equilibrium, utility analysis, demand curves, and elasticity of demand based on lecture notes.

Budget Set

Attainable combinations of a set of two goods, given market prices of goods and the income of the consumer.

Budget Line (Price Line)

A line showing different possible combinations of good-1 and good-2 that a consumer can buy given their budget and market prices, represented by the equation $P_x X + P_y Y = M$.

Utility

The want-satisfying power of a good.

Marginal Utility

The additional utility derived on account of the consumption of an additional unit of a commodity.

Consumer's Equilibrium

A state where a consumer, given their income and market prices, plans their expenditure across different goods and services to maximize total satisfaction.

Indifference Curve

A locus of different combinations of two goods that give the exact same level of satisfaction to the consumer.

Law of Diminishing Marginal Utility

A principle stating that as more and more units of a commodity are consumed, the marginal utility derived from every additional unit declines.

Monotonic Preferences

Consumer preferences where, between any two bundles, one bundle is preferred because it has more of at least one good and no less of the other good compared to the alternative bundle.

Indifference Map

A diagram showing various indifference curves, each representing a different level of satisfaction.

Demand

The quantity of a commodity that a consumer is willing and able to buy at a given price, holding other factors like income, taste, and preferences constant.

Individual Demand Schedule

A tabular presentation of quantities demanded of a given commodity by an individual at different prices at a given time.

Market Demand Schedule

A table showing the total quantities of a commodity that all buyers in the market are ready to buy at different possible prices at a point in time.

Demand Curve

A graphical representation of the maximum quantities per unit of time that consumers are willing to buy at various prices.

Substitute Goods

Goods that can be used in place of each other to satisfy a want, such as tea and coffee.

Complementary Goods

Goods that are used together to satisfy a given want, such as a car and petrol.

Demand Function

An expression showing the functional relationship between quantity demanded and the factors on which demand depends.

Cross Demand

A situation where a change in the price of one commodity results in a change in the demand for another commodity.

Substitution Effect

The shift where a consumer replaces dearer commodities with a commodity that has become comparatively cheaper due to a price drop.

Income Effect

The increase in a consumer's real income resulting from a drop in commodity price, enabling them to buy more at reduced prices.

Giffen Goods

Highly inferior goods characterized by a positive price effect and a negative income effect.

Articles of Distinction

Status symbol goods, such as diamonds or costly carpets, which are demanded more primarily when their price is high.

Cardinal Utility Analysis

An analytical approach formulated by Prof. Alfred Marshall stating that utility can be measured numerically in units called utils.

Ordinal Utility Analysis

An analytical approach formulated by Prof. J.R. Hicks stating that utility cannot be measured numerically, but preferences can be ranked.

Marginal Rate of Substitution (MRS)

The rate at which a consumer is willing to sacrifice units of good Y to obtain an additional unit of good X, represented as $MRS = -\frac{\Delta Y}{\Delta X}$.

Perfectly Elastic Demand

A degree of price elasticity ($E_d = \infty$) where a slight or no change in price leads to infinite changes in quantity demanded.

Perfectly Inelastic Demand

A degree of price elasticity ($E_d = 0$) where quantity demanded does not change at all regardless of price changes.

Unitary Elastic Demand

A degree of price elasticity ($E_d = 1$) where the percentage change in quantity demanded equals the percentage change in price.

Greater Than Unitary Elastic Demand

A degree of price elasticity ($E_d > 1$) where the percentage change in quantity demanded is greater than the percentage change in price.

Less Than Unitary Elastic Demand

A degree of price elasticity ($E_d < 1$) where the percentage change in quantity demanded is less than the percentage change in price.