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Ag Econ

Chapter 6: Consumer Choices

Term/QuestionDefinition/Answer
Budget Constraint shows possible combinations of 2 goods that are affordable given at consumer's limited income
Normal Good still buy or more money depending on income; quality foods
Inferior Goods more mulah, less likely to buy
Total Utility satisfaction derived from consumer choices
Marginal Utility Additional utility provided by one additional unit of consumption MU=change of total utility / change of quantity
Diminishing Marginal Utility common pattern that each marginal unity of a good consumed provides less of an addition to utility than previous unit
What could affect consumer choices? income, prices, and preferences
What is another way Utility/Marginal Utility can be used? Utility/Marginal Utility can be used to analyze how consumer choices change when budget constraint shifts in response to changes in income/price
Substitution Effect when price changes, consumers have incentive to consume less of good w/ relatively higher price and more of good w/ relatively lower price; always happens simultaneously w/ income effect
Income Effect higher price means buying power of income has been reduced, even though actual income hasn't changed; always happens simultaneously with substitution effect. buying power decreased even though availability hasn't
Traditional Economy model assumes rationaly thinking; ppl take all available info and make consistent/informed decisions in best interest; assumes human has complete self control
Behavioral Economics takes into account ppls state of mind; seeks to enrich understanding of decision-making by integrating insights of psychology into economics
What are two other thing behavioral economics do? investigates given price amount that can mean different things to individuals depending on situation leads to decisions appearing outwardly inconsistent/irrational to outside observer
Created by: horktera
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