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Applications of Consumer Theory in Microeconomics

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Termini in questo insieme (20)

  • What does a demand curve represent?

    A demand curve shows the quantity demanded (Qd) of a good at different prices.

  • How is an individual's demand curve derived using consumer theory?

    By finding the optimal consumption bundle at different prices, the quantities demanded at each price form the individual's demand curve.

  • What is the Price-Consumption Curve (PCC)?

    The PCC is the line through optimal bundles at each price when income and the price of the other good are constant.

  • What does the slope of the Price-Consumption Curve indicate?

    The slope indicates whether goods are complements (positive slope) or substitutes (negative slope).

  • How can economists empirically derive a demand curve?

    By measuring each consumer's willingness to pay (WTP) and aggregating across consumers.

  • What is the rule for a consumer to buy a good based on willingness to pay?

    A consumer buys the good if their WTP ≥ market price.

  • How does a rise in income affect demand for normal and inferior goods?

    For normal goods, demand shifts right (increases). For inferior goods, demand shifts left (decreases).

  • What is the Income-Consumption Curve (ICC)?

    The ICC is the line through optimal bundles as income changes, showing how consumption varies with income.

  • How does the shape of the ICC indicate if a good is normal or inferior?

    If consumption of a good increases with income, it is normal. If it decreases, it is inferior.

  • What does the Engel Curve show?

    The Engel Curve shows the relationship between income and quantity demanded of a single good.

  • What does the slope of the Engel Curve indicate?

    The slope indicates the sign of income elasticity (εy), showing if the good is normal (positive) or inferior (negative).

  • What are the two effects that decompose the total effect of a price change on quantity demanded?

    The substitution effect and the income effect.

  • What is the substitution effect?

    Change in quantity demanded due to a change in relative prices, holding utility constant; usually negative when price rises.

  • What is the income effect?

    Change in quantity demanded due to the change in purchasing power (real income) caused by the price change.

  • How do substitution and income effects differ for normal goods when price rises?

    Both effects lead to buying less: substitution effect is negative, income effect is negative.

  • How do substitution and income effects differ for inferior goods when price rises?

    Substitution effect is negative (buy less), but income effect is positive (buy more).

  • What is a Giffen good?

    A rare inferior good where the income effect outweighs the substitution effect, causing quantity demanded to rise when price rises.

  • How can the total effect of a price change be graphically decomposed?

    By drawing a hypothetical budget line parallel to the new one but tangent to the old indifference curve to separate substitution and income effects.

  • What happens to the budget line when the price of a good falls?

    The budget line rotates outward, increasing the consumer's opportunity set.

  • What does an outward shift in the budget line imply for consumption choices?

    Consumers can afford more of both goods, leading to new optimal consumption bundles.