Microeconomics for Business - Chapter 6: Households in Output Markets

Flashcards covering classical consumer theory, budget constraints, consumer preferences, utility, and market demand based on Chapter 6 lecture notes.

Consumer's bundle of goods

The purchased quantities of each of page the goods and services by a consumer.

Budget constraint

The limit on the consumption bundles that a consumer can afford, represented by the inequality $p_1 q_1 + p_2 q_2 \leq y$, where $y$ is the income, and $p$ and $q$ are prices and quantities of goods.

Budget set

All bundles of goods that cost less than or the same as the available budget.

Exogenous variables

Factors in the budget constraint model that are given and not determined by the consumer, specifically market price and budget ($y$, $p_1$, $p_2$).

Endogenous variables

Variables determined within the model, specifically the consumer's choice of quantities ($q_1$ and $q_2$).

Relative price

The price of one good compared to the price of another good, calculated as the absolute value of the slope of the budget constraint: $p_1 / p_2$.

Opportunity cost

The ratio at which goods can be exchanged for each other; for example, the number of units of one good that must be sacrificed to obtain one additional unit of another good.

Money illusion

A situation where a proportional change in both prices and income leads to a change in quantity demanded; its absence implies that the budget line does not change when $p_1$, $p_2$, and $y$ change by the same proportionality factor $\lambda$.

Utility

The satisfaction derived from the consumption of a product; it is an ordinal concept reflecting the ranking of bundles according to consumer tastes.

Total utility

The overall satisfaction that consumers gain from consuming a product.

Marginal utility (MU)

The increase in utility that the consumer gets from an additional unit of a good.

Diminishing marginal utility

The tendency for the additional satisfaction from consuming extra units of a good to fall as consumption increases.

Indifference curve

A line connecting all bundles of goods that provide the consumer with equal utility or satisfaction.

Indifference map

The set of all indifference curves for a given consumer, where higher curves represent higher utility levels.

Completeness of preferences

Also known as the 'axiom of comparison', it assumes a consumer can arrange all bundles and decide if they prefer one to another or are indifferent.

Transitivity of preferences

The 'axiom of transitivity' which assumes that if a consumer prefers bundle X to Z and Z to T, they must also prefer X to T; this implies indifference curves can never intersect.

Non satiation

An assumption that the consumer would rather have more goods than less.

Convexity

The assumption that consumers prefer more variety (a convex combination of bundles) to less variety, leading to indifference curves that are convex towards the origin.

Marginal Rate of Substitution (MRS)

The amount of a good a consumer wishes to receive in compensation for giving up one unit of another good to maintain the same utility level; it equals the slope of the tangent to the indifference curve: $|MRS| = \frac{MU_1}{MU_2}$.

Perfect substitutes

Two goods with straight-line indifference curves and a constant marginal rate of substitution.

Perfect complements

Two goods with rectangular (L-shaped) indifference curves where the marginal rate of substitution is either zero or infinity.

Normal good

A good for which a consumer buys more when their income rises.

Inferior good

A good for which a consumer buys less when their income rises.

Substitution effect

The change in consumption resulting from a price change that moves the consumer along an indifference curve to a point with a different marginal rate of substitution.

Income effect

The change in consumption resulting from a price change that moves the consumer to a higher or lower indifference curve due to changed purchasing power.

Ordinary goods

Goods that obey the law of demand; when the price decreases, the quantity demanded increases.

Giffen goods

Inferior goods that do not obey the law of demand because the negative income effect is larger than the substitution effect ($IE > SE$).

Snob goods

Goods that consumers find more attractive when the price is higher, breaking the negative relationship between price and quantity demanded.

Partial demand curve

A curve showing the relationship between the demand for a good and its own price, while holding the budget and other prices constant.

Engel curve

A curve showing the relationship between the demand for a good and the consumer's budget, holding all prices constant.

Market demand

The sum of the individual demanded quantities of a good by all consumers in the market; graphically the horizontal summation of individual demand curves.