ECON202: Principles of Microeconomics - Lecture 5: Consumers and Incentives

Vocabulary flashcards covering the key concepts from the lecture on consumers and incentives.

Buyer’s Problem

How consumers decide what to buy given their likes, prices, and budget.

Tastes and Preferences

What you like; purchases reflect and reveal consumer preferences.

Budget Set

All bundles of goods and services a consumer can afford with their income and prices.

Budget Constraint

The boundary of the budget set that exhausts the consumer’s budget.

Price-Taker

Prices are fixed and cannot be negotiated; individuals cannot affect market prices.

Opportunity Cost

The value of the foregone alternative when choosing one option.

Marginal Benefit

The additional total benefit from consuming one more unit of a good.

Marginal Benefits per Dollar Spent

MB divided by the good’s price; used to compare benefits per dollar across goods.

Marginal Analysis

Decision-making by comparing marginal benefits and marginal costs.

Consumer Equilibrium

Optimal allocation where MB per dollar spent is equal across all goods within the budget.

Optimality at the Margin

Choosing the last unit where additional benefit per dollar is equalized across goods.

Demand Curve

Relationship between quantity demanded and price derived from optimizing choices.

Consumer Surplus

Difference between what a buyer is willing to pay and what they actually pay.

Market-Wide Consumer Surplus

Sum of all individual consumer surpluses across a market.

Triangle Formula for Consumer Surplus

For a linear demand curve, consumer surplus = (base × height)/2.

Total Benefits

Sum of benefits from consuming up to a given quantity (used to derive marginal benefits).

Elasticity

A measure of how responsive one variable is to a change in another.

Price Elasticity of Demand

Percentage change in quantity demanded divided by percentage change in price.

Arc Elasticity

Elasticity measured using average price and quantity to avoid starting point bias.

Cross-Price Elasticity of Demand

Percentage change in quantity demanded of one good due to a percentage change in the price of another good.

Income Elasticity of Demand

Percentage change in quantity demanded due to a percentage change in income.

Normal Good

A good whose quantity demanded rises with income (positive income elasticity).

Inferior Good

A good whose quantity demanded falls as income rises (negative income elasticity).

Substitute vs Complement (Cross-Price Interpretation)

Cross-price elasticity positive indicates substitutes; negative indicates complements.

Determinants of Price Elasticity

Substitutability, budget share, and adjustment time affect elasticity.

Unit Elastic

Price elasticity of demand equals 1; quantity responds proportionally to price changes.

Perfectly Elastic Demand

Elasticity is infinite; quantity demanded responds to any price change (horizontal demand curve).

Perfectly Inelastic Demand

Elasticity is zero; quantity demanded does not respond to price changes (vertical demand curve).