Podcast
Questions and Answers
A consumer, according to standard economic assumptions, always prefers less of a good to more, regardless of the quantity they already possess.
A consumer, according to standard economic assumptions, always prefers less of a good to more, regardless of the quantity they already possess.
False (B)
If a consumer prefers option A to option B, and option B to option C, then they must prefer option C to option A to maintain transitivity.
If a consumer prefers option A to option B, and option B to option C, then they must prefer option C to option A to maintain transitivity.
False (B)
Prices acting as incentives heavily influence consumer purchasing decisions, and they allow for a formal definition of the absolute cost of goods.
Prices acting as incentives heavily influence consumer purchasing decisions, and they allow for a formal definition of the absolute cost of goods.
False (B)
The budget set comprises all the specific bundles of goods and services that a consumer is mandated to purchase with their income.
The budget set comprises all the specific bundles of goods and services that a consumer is mandated to purchase with their income.
The budget constraint represents the specific combination of goods a consumer can choose when they save a portion of their total budget
The budget constraint represents the specific combination of goods a consumer can choose when they save a portion of their total budget
As the quantity bought of the same type of goods decreases, the marginal benefit increases because the consumer has less stock and enjoys more every extra good that bought after the first one.
As the quantity bought of the same type of goods decreases, the marginal benefit increases because the consumer has less stock and enjoys more every extra good that bought after the first one.
The 'Buyer’s Equilibrium Condition', represented by the equation $\frac{MB_s}{P_s} = \frac{MB_j}{P_j}$, suggests that consumers should aim to equalize the total benefits derived from each good relative to its price, rather than the marginal benefits.
The 'Buyer’s Equilibrium Condition', represented by the equation $\frac{MB_s}{P_s} = \frac{MB_j}{P_j}$, suggests that consumers should aim to equalize the total benefits derived from each good relative to its price, rather than the marginal benefits.
In consumer choice modeling, if the chosen prices and budget do not allow for the purchase of entire units of goods, consumers will always re-adjust their choices to spend any remaining portion of the budget.
In consumer choice modeling, if the chosen prices and budget do not allow for the purchase of entire units of goods, consumers will always re-adjust their choices to spend any remaining portion of the budget.
Flashcards
Consumer Choice Factors
Consumer Choice Factors
Consumer decisions are based on taste/preferences, prices, and budget.
Non-Satiation
Non-Satiation
More of a good thing is generally preferred. Our purchases reflect our tastes.
Completeness (Preference)
Completeness (Preference)
For any two choices, a consumer can decide which they prefer.
Transitivity (Preference)
Transitivity (Preference)
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Budget Set
Budget Set
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Budget Constraint
Budget Constraint
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Decreasing Marginal Benefit
Decreasing Marginal Benefit
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Buyer’s Equilibrium Condition
Buyer’s Equilibrium Condition
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Study Notes
- Consumer decisions involve understanding preferences, prices, and available resources to determine how many goods/services will be obtained.
Consumer Preferences
- Taste and preferences are key factors influencing consumer choices.
- More of a good thing is generally preferred.
- Purchases reveal consumer preferences.
- Assumptions about preferences include non-satiation, completeness, and transitivity.
- Non-satiation: More goods are preferred.
- Completeness: A preference exists for any two choices.
- Transitivity: Preferences are internally consistent. If A is preferred to B, and B to C, then A is preferred to C.
Prices
- Prices act as incentives in purchase decisions.
- Prices formally define the relative cost of goods.
- Buyers are assumed to be price-takers, with constant and given prices.
Budget Set/Constraint
- Budget set: All possible bundles of goods/services that can be purchased with a consumer’s income.
- Budget constraint: Goods or activities a consumer can choose that exhausts the entire budget.
- Assumptions include no saving or borrowing.
- Working with whole units of goods/services but a continuous budget constraint.
Buyer's Equilibrium
- As the quantity of goods increases, the marginal benefit decreases.
- Buyer’s Equilibrium Condition: 𝑀𝐵𝑠/𝑃𝑠= 𝑀𝐵𝑗/𝑃𝑗
- "Equal bang for your buck" principle.
- If marginal benefits are unequal, shifting consumption toward the good with higher marginal benefits per dollar spent improves satisfaction.
- With multiple goods: 𝑀𝐵𝑠/𝑃𝑠=𝑀𝐵𝑗/𝑃𝑗= 𝑀𝐵𝑘/𝑃𝑘
- If optimal choices don't result in consuming entire units, then the consumer chooses the closest integer options before running out of money.
- The optimal choice may involve spending the entire budget on one good, in which case the marginal benefit per € does not have to be equal across goods.
- Points to the right of the budget constraint are unaffordable.
- The slope of the constraint is negative because as one good increases, the other good decreases, and it comes from dividing Pgood1/Pgood2
Price Changes
- If the price of one good changes, the quantity bought could also change the slope would change.
Demand Curve
- If the price decreases, the quantity demanded increases.
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Description
Explore factors influencing consumer decisions: preferences, prices, and budget constraints. Consumer preferences are shaped by assumptions like non-satiation, completeness, and transitivity. Prices are incentives, and the budget set includes affordable goods/services. The budget constraint limits spending based on income.
