Chapter 5 Cards: Consumers and Incentives

Vocabulary flashcards covering key terms from Microeconomics Chapter 5: Consumers and Incentives.

Budget set

The set of all possible bundles of goods and services that can be purchased with a consumer’s income.

Budget constraint

The boundary representing the combinations of goods a consumer can buy with their income, assuming no saving or borrowing; plotted as a smooth line.

Buyer’s problem

The framing of consumer choice: what you like, prices, and how much money you have to spend.

What you like

A consumer’s tastes and preferences that determine the benefits from consuming goods and services.

Prices

The monetary costs of goods and services that influence purchasing decisions.

How much money you have to spend

A consumer’s income that constrains what they can purchase.

Demand curve

A curve showing the quantity of a good a consumer would buy at various prices, holding other factors constant; typically downward sloping.

Willingness to pay

The highest price a buyer is willing to pay for a unit of a good.

Consumer surplus

The difference between what a buyer is willing to pay and what they actually pay for a good.

Elasticity

A measure of how sensitive one economic variable is to a change in another (a ratio of percentage changes).

Price elasticity of demand

The percentage change in quantity demanded in response to a percentage change in the good’s price.

Elastic demand

Price elasticity of demand greater than 1; quantity demanded responds more than price changes.

Perfectly elastic demand

Price elasticity is infinite; a tiny price increase drops quantity demanded to zero; horizontal demand curve.

Unit elastic demand

Price elasticity of demand equal to 1; a percentage change in price leads to an equal percentage change in quantity demanded; total expenditure unchanged.

Inelastic demand

Price elasticity of demand less than 1; quantity demanded responds relatively little to price changes.

Perfectly inelastic demand

Price elasticity of demand equal to 0; quantity demanded is completely unresponsive to price; vertical demand curve.

Cross-price elasticity of demand

The percentage change in quantity demanded of one good in response to a percentage change in the price of another good.

Substitutes

Two goods for which an increase in the price of one leads to an increase in the demand for the other (positive cross-price elasticity).

Complements

Two goods for which a decrease in the price of one leads to an increase in the demand for the other (negative cross-price elasticity).

Income elasticity of demand

The percentage change in quantity demanded in response to a percentage change in income.

Normal goods

Goods for which demand rises as income rises (positive income elasticity).

Inferior goods

Goods for which demand falls as income rises (negative income elasticity).

Closeness of substitutes

The degree to which close substitute options exist, affecting the price elasticity of demand.

Budget share

The portion of a consumer’s budget spent on a good; larger budget shares tend to yield higher elasticity.

Available time to adjust

The length of time available to adjust to price changes; longer time allows greater substitution and higher elasticity.

Arc elasticity

Elasticity calculated using the midpoint (average) of price and quantity changes over a range.

Indifference curve

A curve representing combinations of goods that give a consumer the same level of utility.

Utility

A measure of satisfaction or happiness a consumer derives from consuming goods and services.

Income effect

Change in consumption resulting from a change in real income due to a price change, holding prices constant.

Substitution effect

Change in consumption due to a change in relative prices, holding the consumer on a constant level of utility.