1788049
Description
Flashcards by Jack Gibbons, updated more than 1 year ago
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Created by Jack Gibbons
over 9 years ago
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| Question | Answer |
| What is the budget share of a good? | The percentage of the consumers total spending that is made up from good 'x' or the good in discussion. So for example, Bread makes up 20% of a persons yearly spending (fake example). |
| What is a luxury, inferior and necessary good? Oh and a normal good. | A luxury good is one of a higher quality and therefore price. An Inferior good is a lower quality and lower price adequate substitute for the luxury good. Inferior goods are readily swapped out for luxury goods when incomes rise. Necessary goods lie in the middle and the demand for these fluctuates only slightly when price increases or income increases. An example of a necessary good would be petrol. A normal good increases in demand when there is a rise in income. |
| Just to recap: Normal . Inferior . Necessity . Luxury | Normal Good- A good is normal if the consumer buys more when they are earning more. Quantity demanded rises relatively to income. Luxury Good- Rises strongly with income. e.g. a BMW Necessity- Rises fractionally with an increase in income. e.g. food Inferior- Demand falls with an increase in income. People move to higher quality goods, luxury goods. |
| What does the substitution effect say? | The substitution effect says that as similar goods fall in price, the demand for the good will fall. |
| What does the income effect say? | The income effect says that as a price falls, the real income will increase and people will get more for their money. Demand will therefore increase for all goods. |
| Substitution effect v.s. Income effect | If the price of substitute products decreases, does this mean more people will buy the new product, and thus demand will decrease for product x ? Yes But what if the income effect means that people have more money now and they no longer want to buy inferior goods? They wan to buy luxury goods? Does this mean that the substitute effect is discarded in the inferior goods? In some products the income effect will outweigh the substitution effect. For example noodles. Product x is a noodle packet. Product y is a cheaper microwave pasta pot. Demand should increase for the pasta pot. However if the income effect means that peoples money is worth more, then this means that they will buy neither pasta nor noodles, but a good that is not inferior- a good that is luxury. |
| What is real income? | This is just inflation adjusted income. If you still don't get it, look below- but its so easy to understand. INVESTOPEDIA EXPLAINS 'REAL INCOME' In other words, real income refers to the amount of goods and services you can buy today compared to the price of the same goods and services you could have purchased in another time period. For example, if it costs you $2,000 more to purchase the same amount of goods and services (i.e. food, gas, rent, utilities, interest, etc) this year compared to last year, and your annual income stayed the same, then your real income has actually decreased by $2,000. |
| What is inflation? | Inflation describes the way in which the prices of goods and services increases. |
| What is tastes? | Tastes is the utility (happiness/satisfaction) a consumer achieves from the consumption of a product. |
| What is marginal utility? | This is the added utility from consuming one more of the good, holding constant the quantity of other goods consumed. So if you have one chocolate bar, how much extra utility will the next one add? |
| What is diminishing marginal utility? | Diminishing marginal utility is the fall in the added utility when extra units are consumed. Usually the marginal utility falls more and more relatively to how many extra units you consume. For example, A cold refreshing beer. The first one will taste amazing, the second one will taste good, the third will taste average, the fourth will be nothing special, the fifth may actually make you feel ill, the sixth may add nothing but make you feel even worse. So as you carry on adding units your extra utility/satisfaction falls. |
| How is a marginal utility graph presented? | Marginal Utility given in a price is on the x axis. On the Y axis is the quantity consumed. The Quantity consumed bounces of a curved line that is the marginal utility line. This then reflects onto the X axis. So we are given a quantity consumed, and then how much marginal utility this gives us. We will notice that the first quantities have higher marginal utility. Take the example of a cold refreshing beer. Nothing beats that first sip. |
| What is the phenomenon that says that people will buys some goods because they are expensive? | This is the conspicuous consumption phenomenon. Conspicuous (inconspicuous as the opposite) means 'clearly visible'. This is because people are buying things to make their wealth visible. like buying a rolex. There are cheaper ways of telling the time. |
| What is supply? | Supply is the quantity of items producers wish to offer for sale at each conceivable price. |
| What is a supply curve? | A supply curve is a curve that shows the quantity supplied at each possible price, other things equal. |
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