Studied by 0 peopleA budget line
A line that marks the boundaries between those combinations of goods/services that a household can afford to buy and those it cannot afford
What graph is this?
A Budget Line
What affects changes in consumption possibilities?
income and price
A rise in income?
shifts the budget line outward
A change in income?
changes the slope of the budget line
Preferences
A description of a persons likes and dislikes that determine what possibility is chosen
Utility
The benefit that a person gets from the consumption of goods/services
Total Utility
The total benefit that a person gets from the consumption of all the different goods/services
More consumption generally?
Gives more total utility
Marginal Utility
The change in total utility that results from a one-unit increase in the quantity of a good consumed
Describe Marginal Utilities' sign
It is positive
The principle of diminishing marginal utility
The tendency for marginal utility to decrease as the consumption of a good increases
What graph is this?
Total utility graph
What graph is this?
Marginal Utility graph
Do smaller quantities within the budget line maximize a persons total utility?
No
In a spreadsheet which column value would you want to maximize?
The total Utility values of both goods
Consumer Equilibrium
A situation in which a consumer has allocated all of their available income in a way that maximizes their total utility
Marginal Utility per rand
The marginal utility from a good that results from spending one more rand on it
The formula for marginal utility per rand is
MU / price
A consumers total utility is maximized when?
All the available income is spent
Goods have equal marginal utility per rand
The following graph shows how to?
Equalize marginal Utility per rand
What are the units for utility?
The units are arbitrary
Does the marginal utility theory predict the law of demand?
Yes
What else does the marginal utility theory predict?
A fall in the price of a substitute of a good decreases the demand for the good
For a normal good, a rise in income increases demand
Describe affordable combinations
The lower the price of good 1, the more of good 1 or good can a consumer purchase
does price elicit a change in preferences?
No
Describe the substitution effect
Substituting a lower priced good for another good
Describe the Income effect
More incomes = more goods
The following is a change in?
A change in quantity demanded
The following is a change in?
A change in demand
The demand curveā¦
Traces the quantities that maximize utility at each price
The following graph shows?
A decrease in quantity demanded
The following graph shows?
How an increase in income increases demand
The larger the income
The more of a normal good a consumer buys
Behavioral Economics
Studies the way in which limits on the human brainās ability to compute and implement rational decisions influences economic behavior.
Anomalies
Choices that do not seem to be rational
Bounded rationality
Rationality that is limited by the computing power of the human brain
Faced with uncertainty, people base choices off other people. This is an example of?
Bounded rationality
Bounded Willpower
The willpower that prevents us from making a decision that we know at the time of making the decision will lead to regret later on
Bounded self-interest
The limited self-interest that results in sometimes suppressing our own interests to help others
The main applications of Behavioral economics is
Finance
Savings
The endowment effect
The tendency for people to value something more highly simply because they own it.
If you have allocated income to maximize utility, then?
The price you are willing to pay = the price you would be willing to give up something you own
Neuroeconomics
The study of the activity of the human brain when a person makes an economic decision
Note
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