Economics Chapter 10: Consumer Choice and Behavioral Economics – Flashcards
Unlock all answers in this set
Unlock answersquestion
Economic model of consumer behavior
answer
consumers will buy the combo that makes them as well off as possible from all combos budges allow them to buy
question
Utility
answer
Enjoyment or satisfaction people receive from consumption Difficult to measure directly, economist used to try t in units of utils
question
Marginal Utility
answer
Change in total utility a person receives from consuming one additional unit
question
Total Utility
answer
Rises then falls as marginal utility declines until it eventually becomes negative
question
Height of marginal utility curve
answer
Represents the change in utility as a result of consuming an additional unit
question
Law of Diminishing Marginal Utility
answer
Principle that consumers experience diminishing additional satisfaction as they consume more during a given period of time
question
Budget constraint
answer
Limited amount of income available to consumers to spend
question
Maximize utility
answer
rule of equal marginal utility per dollar spent
question
Consumers should consume goods up to the point where
answer
their marginal utilities per dollar spent are equal and the consumer is at the edge of his budget constraint, provided that Marginal utilities are not negative
question
Utility Maximization formula
answer
MUa/Pa=MUb/Pb and Spendinga+Spendingb=Budget Constraint
question
Marginal utilities per dollars spent are not equaled
answer
Total utility is not maximized
question
Rule of equal marginal utility per dollar spent to analyze how consumers adjust buying decisions w/ price change
answer
Income effect Substitution effect
question
Income effect
answer
Change in Q demanded of a good that results from the effect of a change in P of consumer purchasing power *all other factors constant
question
Substitution Effect
answer
Change in Q demanded of a good that results from a change in price, making good more or less expensive relative to other goods, holding constant the effect of price change on consumer purchasing power. Changes the opportunity cost of consuming
question
Income&Substitution effects on diff types of goods
answer
Normal- work together to up or down Q demanded Inferior- Income effect works in opposite direction, sub always in same direction
question
Demand curve
answer
Plotting optimal consumption points at different prices
question
Determine market demand curve
answer
Adding horizontally all individual demand curves
question
Why is the demand curve downward sloping?
answer
Income and Sub effects work in same direction for normal goods or Substitution effect outweighs the income effect for most inferior goods
question
Giffen Goods
answer
upward sloping demand curve As Q demanded increase as P rises Exceedingly rare in real life
question
Social Factors
answer
Culture, customs, religion explain consumer choices Partly on characteristics of products, partly on how many other people are buying the product
question
Celebrity endorsements
answer
Cause demand for a product to rise
question
Network Externalities
answer
Usefulness increases as # of consumers increases May lead to inferior products as a result of switching costs. Make selection of products path dependent Inferior VHS systems represent market failures, fail to produce efficient output
question
Fair pricing
answer
-Ultimatum game recipients would reject unfair allocations of $20 -Price show/game tickets below what could be charged -Buyers buy together and amount they wish to consume depends on the amount others are consuming -Business may give up some profits in short run to keep customers happy with fair prices in long run
question
Behavioral Economics
answer
Study of situations in which people make choices that do not appear to be economically rational
question
Ignoring Nonmonetary Opportunity Costs
answer
Endowment effect- unwilling to sell good they own even if offered a price > price they would be willing to pay Nonmonetary opportunity costs are just as real as monetary costs & should be taken into account
question
Failing to ignore Sunk Costs
answer
Sunk Cost- Cost that has been paid and cannot be recovered Not let sunk costs impact their decision making
question
Being unrealistic about Future Behavior
answer
Tendency to overvalue utility of current choices, ex smoking, undervalue utility received in future from choice, ex cancer Eat a lot today because expect to eat less tomorrow, underestimation of the costs of choices
