# AMPP Chapter 3_Vocab

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1. Theory of consumer behavior
The explanation of how consumers allocate incomes to the purchase of different goods and services
2. 3 steps to understand Consumer Behavior
• 1. Consumer Preferences
• 2. Budget Constraints
• 3. Consumer Choices
3. Consumer Preference
What people like, what might prefer one good to another
4. Budget Constraints
Consumers also consider price. Their spending on limited incomes which restrict the quantities of goods they can buy
5. Consumer Choices
Given their preferences and limited incomes, consumers choose to buy combinations of goods that maximize thier satisfaction
6. Market Basket (or Bundle)
List with specific quantities of one or more goods

Collection of one or more goods/ Commodities
7. 4 Basic Assumptions about Preferences
• 1. Completeness
• 2. Transitivity
• 3. More is better than less
• 4. Diminishing Marginal Rate of Substitution
8. Completeness
Consumers can compare and rank all possible baskets.

Indiffernetly satisfied with either baskets.
9. Transitivity
if a consumer prefers basket A to basket B and basket B to basket C, then the consumer laso prefer A to C
10. More is Better than less
More is always better, even if just a little better
11. Diminishing Marginal Rate of Substitution
Inddifference Curves are usually conves, or bowed inward (downward).
12. Indifference Curve
Curve representing all combinations of market baskets that provide a consumer with the same level of satisfaction
13. Indifference Map
Graph containing a set of indifference curves showing the market baskets among which a consumer is indifferent
14. Marginal Rate of Substitution (MRS)
Maximum amount of a good that a consumer is willing to give up in order to obtain one additional unit of another good.

• Decrease in Vertical axis
• Increase in Horizontal axis
15. Perfect Substitutes
Two goods for which the marginal rate of Substitution of one for the other is a constant.

e.g. Apple juice or Orange juice
16. Perfect Complements
Two goods for which the MRS is zero or infite; the indifference curves are shaped as right angles.

e.g. Right shoes and left shoes
17. Utility
Numerical score representing the satisfaction that a consumer gets from a given market basket
18. Utility Function
Formula that assigns a level of utility to individual market baskets
19. Function
Describe relationship between two (which is X and Y) varibles.

• Y=F(X)
• when there is value of X, automatically there is value of Y
20. Budget Constraints
Constraints that consumers face as a result of limited incomes

Every consumer has limited income
21. Budget line
All combinations of goods for which the total amount of money spent is equal to income

I=P(f)Q(f)+P(c)Q(C)
22. Marginal benefits
Benefit from the consumption of one additional unit of a good
23. Marginal cost
Cost of one additional unit of a good
24. Corner Solution
Situation in which the marignal rate of substitution of one good for another in a chosen market basket is not equal to the slope of the budget line
25. Marginal utility (MU)
Additional satisfaction obtained from consuming one additional unit of a good
26. Diminishing Marginal Utility
Principle that as more of a good is consumed, the consumption of additioanl amounts will yield smaller additions to utility
27. Equal Marginal Principle
Principle that utility is maximized when the consumer has equalized the marginal utility per dollar of expenditure across all goods
 Author: uhxm ID: 284803 Card Set: AMPP Chapter 3_Vocab Updated: 2014-10-03 21:11:18 Tags: AMPP Folders: economics Description: for KDI school Show Answers: