Lesson 7

    Cards (30)

    • What is the focus of Topic 2 in the study material?
      It looks at how individuals make their decisions.
    • What is the assumed relationship between price and quantity demanded?
      Lower price increases quantity demanded.
    • What is the assumed relationship between wage and quantity supplied?
      Higher wage increases quantity supplied.
    • What is the problem with the assumed relationships in consumer behavior?
      They may not hold true for all goods.
    • What is the purpose of developing a theory of individual choices?
      • Model underlying behavior behind demand & supply curves
      • Understand important aspects of individuals’ behavior
      • Provide a framework to understand effects of government policy
    • What does consumer theory examine?
      How a person makes sensible decisions under scarcity.
    • What is the first step in the decision-making process according to the lecture?
      What individual wants to do.
    • What is the second step in the decision-making process?
      What individual can do.
    • What is the third step in the decision-making process?
      The Decision.
    • How are consumer preferences represented in the study material?
      • Represented through bundles of goods
      • Assumed only two goods for simplicity
      • Example bundles: A = (3, 3), B = (4, 1), C = (1, 4), D = (3, 2)
    • What are the four bundles of beer and pizza mentioned?
      A = (3, 3), B = (4, 1), C = (1, 4), D = (3, 2).
    • What are the five axioms of consumer theory?
      Completeness, Transitivity, Continuity, Monotonicity, Convexity.
    • Why do we have axioms in consumer theory?
      To have the simplest possible theory and make clear hidden assumptions.
    • What does Axiom 1: Completeness state?
      All bundles can be compared.
    • What does Axiom 2: Transitivity state?
      If A is preferred to B and B is preferred to C, then A is preferred to C.
    • What does Axiom 3: Continuity imply?
      Similar bundles have similar rankings.
    • What does Axiom 4: Monotonicity state?
      If A has more of both goods than B, then A is strictly preferred to B.
    • What does Axiom 5: Convexity imply?
      Averages are preferred to extremes.
    • What are the characteristics of 'well-behaved' preferences?
      • Similar bundles have similar ranks
      • More is preferred to less
      • Averages preferred to extremes
    • What is total utility?
      The number assigned to a bundle to summarize its rank.
    • What is the implication of Axiom 1, 2 & 3 for indifference curves?
      Indifference curves can be used to represent preferences.
    • What does Axiom 4 imply about the shape of indifference curves?
      Indifference curves are downward sloping.
    • What does Axiom 5 imply about the shape of indifference curves?
      Indifference curves are bowed towards the origin.
    • What does Axiom 2 imply about the relationship between indifference curves?
      Indifference curves cannot cross.
    • What are the properties of indifference curves?
      • Indifference curves are made of bundles
      • They join bundles with the same total utility
      • Cannot cross each other
      • Further from the origin, higher the utility
      • Usually negatively sloped
    • What should you be able to do after this lecture?
      1. State the five axioms of consumer theory
      2. Rank bundles for individuals with well-behaved preferences
      3. Describe the implications of the axioms for indifference curves
    • What is the implication of having 'bads' in consumer theory?
      Increasing the quantity of 'bads' lowers utility.
    • What is a bliss point in consumer theory?
      A bundle with the maximum possible utility.
    • What happens to utility when consumption exceeds the bliss point?
      Utility decreases after a certain amount.
    • What are the implications of the axioms for indifference curves?
      • Indifference curves can represent preferences
      • They are downward sloping
      • They are convex to the origin
      • They cannot cross each other