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In the case of savings, the same type of effects can apply. For
example, say interest rates rise. Individuals may save more because the
reward (price) for saving has risen, and individuals substitute future
consumption for present consumption. However, higher interest rates also
imply that less saving is required to attain a given future amount of
money. If the latter effect (the income effect) dominates, then it is
possible to observe higher interest rates resulting in less savings.
Given market prices and with a limited income. In effect, consumer
choice theory first models what the consumer would like to consume, and
then it examines what the consumer can consume with limited income.
That there is simply not enough of everything to satisfy the needs and desires of everyone at a given time.
Non-negative. Any given basket could have zero of one or more of those goods.
The good now becomes relatively less costly compared to other goods.
That is, it becomes more of a bargain than other things the consumer
could purchase; thus, more of this good gets substituted for other goods
in the consumer's market basket. Additionally, though, with the decline
in that price, the consumer's real income rises. That is the
substitution effect and income effect of a change in the price of a good
completeness , One indifference curve
A good that increases in desirability with price. But they are not
inferior goods and they do violate the axioms of choice that form the
foundation of accepted demand theory.
the tangent to the indifference curve at any given bundle.
That the consumer can always make comparisons among all pairs of
bundles of goods and identify preferences before knowing anything about
the prices of those baskets.
The budget constraint outward along the horizontal axis but leaves the vertical intercept unchanged
His income and the prices he must pay for the goods he consumes.
At point a, where the highest indifference curve is attained while not violating the budget constraint.
That the pure substitution effect must always be in the direction of
purchasing more when the price falls and purchasing less when the price
rises. This is because of the diminishing marginal rate of substitution,
or the convexity of the indifference curve.
The assumption of non-satiation (more is always better) ensures that
all bundles lying directly above, directly to the right of, or both
above and to the right (more wine and more bread) of point a must be
preferred to bundle a.
Ordinal, as contrasted to a cardinal, ranking. Ordinal rankings are
weaker measures than cardinal rankings because they do not allow the
calculation and ranking of the differences between bundles.
The budget constraint becomes less steep
If Px were to rise, the budget constraint would become steeper,
pivoting through the vertical intercept. Alternatively, if Py were to
rise, the budget constraint would become less steep, pivoting downward
through the horizontal intercept.
Qs are the quantities of each of the respective goods and services in
the bundles. In the case of two goods—say, ounces of wine (W) and slices
of bread (B)—a utility function might be simplyU = f(W,B) = WB or the
product of the number of ounces of wine and the number of slices of
bread.
The axiom of completeness
It rules out the possibility that she could just say, "I recognize
that the two bundles are different, but in fact they are so different
that I simply cannot compare them at all." The assumption of complete
preferences cannot accommodate such a response.
different marginal rates of substitution when evaluated at identical bundles
transitivity , ever cross.
A fundamental model of how consumer preferences and tastes might be
represented. It explores consumers' willingness to trade off between two
goods (or two baskets of goods), both of which the consumer finds
beneficial.
When comparing any three distinct bundles, A, B, and C, if A is
preferred to B, and simultaneously B is preferred to C, then it must be
true that A is preferred to C. It is assumed to hold for indifference as
well as for strict preference.
All the combinations of two goods such that the consumer is entirely indifferent among them.
Consumer choice theory can be defined as the branch of microeconomics
that relates consumer demand curves to consumer preferences.
Linear, constant
It is important to note that this equilibrium point represents the
tangency between the highest indifference curve and the budget
constraint. At a tangency point, the two curves have the same slope,
meaning that the MRSxy must be equal to the price ratio, Px/Py.
A mathematical representation of the satisfaction derived from a consumption basket
If income were to rise, the entire budget constraint would shift outward, parallel to the original constraint,
From the indifference curve map and a set of budget constraints representing different prices of of the good
The MRSBW is the rate at which the consumer is willing to give up wine
to obtain a small increment of bread, holding utility constant (i.e.,
movement along an indifference curve).
IP Q=−BQ
This assumption is sometimes referred to as the "more is better"
assumption, that is, we usually assume that in at least one of the
goods, the consumer could never have so much that she would refuse any
more, even if it were free.
It is the assumption that the consumer knows his or her own tastes and
preferences and tends to take rational actions that result in a more
preferred consumption "bundle" over a less preferred bundle.
The company's production opportunity frontier shows the maximum number
of units of one good it can produce, for any given number of the other
good that it chooses to manufacture.
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