Indifference Curve Analysis Flashcards

This set of vocabulary flashcards covers key concepts in Consumer Theory, including Budget Lines, Indifference Curve characteristics, and the effects of price and income changes.

Ordinal Approach

An approach to consumer behavior where consumers rank or order their preferences without measuring absolute levels of satisfaction.

Ordinal Utility

The notion that a consumer can rank combinations of products in order of preference relative to one another.

Budget Constraint

All the possible combinations of goods a consumer can afford given their income and market prices, representing necessary trade-offs.

Budget Line

A line showing different combinations of two goods a consumer can afford with their available income and the prices of the products.

Normal Goods

Goods for which the quantity demanded increases as a consumer's income increases.

Purchasing Power

The financial ability to buy products, which is reduced when prices increase and increased when income rises.

Consumer Equilibrium

The point of contact between the budget line and the highest indifference curve, achieving the highest level of satisfaction for a given income.

Marginal Utility Equilibrium Condition

$\frac{MU_x}{P_x} = \frac{MU_y}{P_y}$, where the marginal utility of a product divided by its price is equal across all products.

Indifference Curve

A curve showing all combinations of two goods that yield the same level of satisfaction or utility to a consumer.

Completeness

An assumption that a consumer is capable of ranking all possible combinations of goods and services in an order of preference.

Transitivity

An assumption that consumer choices are consistent, preventing indifference curves from intersecting.

Non-satiability

The assumption that consumers are never fully satisfied and will always prefer more of a good to less.

Marginal Rate of Substitution (MRS)

The rate at which a consumer is willing to sacrifice units of one product to obtain extra units of another while maintaining the same level of satisfaction.

Diminishing Marginal Rate of Substitution

The tendency for the MRS to decrease as a consumer moves down an indifference curve from left to right.

Substitution Effect

The change in quantity demanded of a commodity due to a change in its relative price alone, while keeping real income unchanged.

Income Effect

The change in quantity demanded resulting from a change in real income or purchasing power due to price fluctuations.

Price Effect

The total movement in consumption from the original equilibrium to a new equilibrium following a price change, composed of the substitution and income effects.