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Economics Test 2 (got 96%)

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Department
Economics
Course
ECON 2000
Professor
All Professors
Semester
Fall

Description
Economics Test 2Chapter Six Every household must make three basic decisions 1How much of each product or output to demand2How much labor to supply3How much to spend today and how much to save for the futureSeveral factors influence the quantity of a given good or service demanded by a single household 1The price of the product2The income available to the household3The households amount of accumulated wealth4The prices of other products available to the household5The households tastes and preferences6The households expectations about future income wealth and pricesRecall that demand schedules and demand curves express the relationship between quantity demanded and price A change in price leads to a movement along a demand curve A change in income in other prices or in preferences shift demand curves to the left or the rightchanges in demand The Budget ConstraintBudget Constraintthe limits imposed on household choices by income wealth and product prices Opportunity Set or Choice Setthe set of options that is defined and limited by a budget constraint As long as a household faces a limited budgetand all households ultimately dothe real cost of any good or service is the value of the other goods and services that could have been purchased with the same amount of money The real cost is its opportunity cost and opportunity cost is determined by relative pricesIf a price or a set of prices falls but income stays the same the opportunity set gets bigger and the household is better offReal Incomeset of opportunities to purchase real goods and services PXPYIXyThe Equation of Budget Constraint Where PxPrice of X Pyprice of Y Xthe quantity of X consumed Ythe quantity of Y consumed When the price of a good decreases the budget constraint swivels to the right increasing the opportunities available and expanding choice Figure 62 pg 125The Basics of Choice Utility Utilitythe satisfaction a product yields Marginal utility MUthe additional satisfaction gained by the consumption or use of one more unit of a good or service Total Utilitythe total amount of satisfaction obtained from consumption of a good or service The difference between Marginal Utility and Total Utility is that MU comes only from the last unit consumed total utility comes from all units consumedThe Law of Diminishing Marginal Utilitythe more of any one good consumed in a given period the less satisfaction utility generated by consuming each additional marginal unit of the same good When marginal utility is zero total utility stops rising When two activities cost different amounts you must find the marginal utility per dollar spend on each activity The Utility Maximizing Ruleequating the ratio of the marginal utility of a good to its price for all goods MUxMUyforallgoodsThe Equation for Utility Maximizing Rule PxPyDiminishing Marginal Utility and DownwardSloping Demand The concept of diminishing marginal utility leads us to conclude that demand curves slope downward Income and Substitution Effects Income and substitution effects give an explanation for downwardsloping demand curves that does not rely on the concept of utility or the assumption of diminishing marginal utility
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