THEORY OF CONSUMPTION

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Created by
PEDROSO, JEREMY DENZELL M.

Cards (19)

  • What are the three steps involved in the study of consumer behavior?
    CONSUMER PREFERENCES BUDGET CONSTRAINTS AND CONSUMER CHOICES
  • This is the amount of satisfaction derived from a commodity or service at a particular time?
    UTILITY
  • THE UTILITY FUNCTION - It is a calculation for how much someone desires something, and it is relative
  • ORDINAL UTILITY - The consumer only ranks choices in terms of preference, but we do not give exact numerical figures for utility
  • CARDINAL UTILITY - It is the idea that economic welfare can be directly observable and given a value
  • LAW OF DIMINISHING MARGINAL UTILITY - Talks about as consumption increases, the marginal utility derived from each additional unit declines
  • LAW OF EQUI-MARGINAL UTILITY - It is a rule of economics that states a consumer will distribute their income on various commodities in a manner that the marginal utility derived from the last unit of money spent on each good is equal.
  • LAW OF DIMINISHING MARGINAL UTILITY - States that as consumption increases more and more, marginal utility will be less and less
  • INDIFFERENCE CURVES - It represents all combinations of market baskets that provide the same level of satisfaction to a person
  • INDIFFERENCE MAP - Each indifference curve in the map shows the person is indifferent
  • MARGINAL RATE OF SUBSTITUTION - Quantifies the amount of one good a consumer will give up to obtain more of another good
  • BUDGET CONSTRAINTS - The set of baskets that a consumer can purchase with a limited amount. It’ s composed by:
    • Budget Line
    • Budget Set
  • BUDGET LINE - It indicates all combinations of two commodities for which total money spent equals total income
  • What is the formula of Budget line?
    P1 + P2 = I
  • BUDGET SET or OPPORTUNITY LEVEL - It includes all possible consumption bundles that someone can afford given the prices of goods and the person's income level.
  • When a budget increases, consumption possibilities -EXPAND
  • When a budget increases, shift the budget line RIGHTWARD
  • When a budget decreases - CONSUMPTION POSSIBILITIES SHRINK
  • When a budget decreases, shift the budget line LEFTWARD