Lecture 2 Revision: Consumer Behavior and Utility

These flashcards cover key concepts related to consumer behavior, utility, and market dynamics as discussed in Lecture 2.

What is willingness to pay?

It is the maximum amount a consumer is willing to spend for a good or service.

What is consumer surplus?

Consumer surplus is the difference between what a consumer is willing to pay and what they actually pay, measuring the extra benefit received.

What does diminishing marginal utility refer to?

The tendency for a consumer to derive less additional satisfaction from consuming more units of a good.

What is the substitution effect?

When the price of a good falls, it becomes relatively cheaper, leading people to switch from alternatives to that good.

What is the income effect?

A lower price means a consumer's purchasing power increases, allowing them to buy more with the same income.

What does a budget constraint show?

It shows all the combinations of goods a consumer can afford, given their limited income and prices of goods.

How do budget constraints relate to consumer choices?

Consumers aim to maximize their utility while staying within their budget according to their preferences.

What happens when marginal benefit falls below price?

Consumer surplus declines, resulting in overconsumption where consumers keep buying despite declining additional satisfaction.

What occurs when a consumer reaches their optimal consumption point?

The highest possible indifference curve touches the budget line, maximizing satisfaction given their income.

What is the Equalising Marginal Utility Rule?

To maximize total satisfaction, a consumer should ensure the marginal utility per dollar spent is the same for all goods.