Economics Exam #2 - Economics Exam#2 Review Chapters 7 8 9 10 11 12 13 14 15 Chapter 7 Consumer Behavior Utility a measure of the amount of satisfaction

Economics Exam #2 - Economics Exam#2 Review Chapters 7 8 9...

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Economics Exam #2 ReviewChapters 7, 8, 9, 10, 11, 12, 13, 14, 15Chapter 7 Consumer BehaviorUtility:a measure of the amount of satisfaction a person derives from somethingRevealed Preference: the idea that people’s preferences can be determined by observing their choices and behaviorUtility Function:a formula for calculating the total utility that a particular person derives from consuming a combination of goods and servicesBundle: a unique combination of goods that a person could choose to consumeMarginal Utility: the change in total utility that comes from consuming one additional unit of a good or serviceDiminishing Marginal Utility:theprinciple that the additionalutility gained from consumingsuccessive units of a good orservice tends to be smaller thanthe utility gained from theprevious unit
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Budget Constraint: a line that is composed of all thepossible combinations of goods and services that aconsumer can buy with her or his incomeChanges in IncomeThe entire budget line shifts out, but sloperemains the sameChanges in PriceNormal Goods: demand increases as income increases (steak)Inferior Goods: demand decreases as income increases (ramen)Income effect) the change in consumption that results from increased effective wealth due to lower prices (causes budged line to rotate outward)Substitution effect) the change in consumption that results fro a change in the relative price of goods- opportunity cost changedFrames of Reference:Utility based on what others around you have (salary example)Altruism:a motive for action in which a person’s utility increases simply because someone else’sutility increasesReciprocity: responding to another’s action with a similar actionChapter 8 Behavioral EconomicsBehavioral Economics: a field of economics that draws on insights from psychology to expand models of individual decision-makingTime inconsistency: when we change our minds about what we want simply because of the timing of the decision (saying you will want an apple next week but picking cake when the time comes)Commitment Device: an arrangement entered into by an individual with the aim of helping fulfill a plan for future behavior that would otherwise be difficultSunk Cost: a cost that has already been incurred and cannot be refunded or recovered*People are usually prone to undervaluing opportunity costswhen they are nonmonetary (time)Implicit cost of ownership- people value things more once they possess themEx. keeping a $200 bike in your garage, even though you wouldn’t bay $200 to buy itFungible:easily exchangeable or substitutable
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-People can create mental categories for money to reduce temptation-People are more likely to spend money recklessly if they have recently gained itChapter 9 Game Theory & Strategic ThinkingGame: a situation involving at least two people that requires those involved to think strategicallyGame Theory:the study of how people behave strategically under different circumstancesBehaving Strategically:
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