AMPP Chapter 3_Vocab

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AMPP Chapter 3_Vocab
2014-10-03 17:11:18
for KDI school
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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

  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