ECON 1000 Chapter Notes - Chapter 9: Demand Curve, Inferior Good, Normal Good

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Consumption possibilities: consumption choices are limited by income and by prices. A household has a given amount of income to spend and cannot influence the prices of the goods a(cid:374)d se(cid:396)(cid:448)i(cid:272)es it (cid:271)uys. A household"s (cid:271)udget line describes the limits to its consumption choices. Divisible and indivisible goods: some goods called divisible goods can be bought in any quantity desired. We can best understand household choice if we suppose that all goods and services are divisible. Affordable and unaffordable quantities: a (cid:272)o(cid:374)su(cid:373)e(cid:396)"s (cid:271)udget li(cid:374)e is a (cid:272)o(cid:374)st(cid:396)ai(cid:374)t between what is affordable and what is unaffordable. I(cid:374) lisa"s (cid:272)ase, she can afford any point on the line and inside it. She cannot afford any point outside the line. The constraint on her consumption depends on the prices and her income, and the constraint changes when the price of a good or her income changes. The budget equation starts with the fact that.

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budget line

marginal utility

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market demand

consumption bundle

substitution effect

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total effect

income effect

transitive property of preferences

indifference curves

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the marginal rate of substitution

utility function

1.	_____	The satisfaction or benefit that consumers receive from consuming goods or services.
2.	________________ _	A particular combination of specific quantities of goods or services
3.	________________ _	Consumers can rank all conceivable bundles of goods or services
4.	_____	If A is preferred to B, and B is preferred to C, then A is always preferred to C.
5.	_____	Equation showing a consumerâs perception of the total utility forthcoming from consuming each bundle of goods and services.
6.	_____	A set of consumption bundles each and every one of which provides a consumer with exactly the same level of total utility.
7.	_____	The number of units of Y that must be given up for total utility to remain the same when one more unit of X is consumed.
8.	_____	The addition to total utility attributable to consuming one more unit of a good, holding the consumption of all other goods constant.
9.	_____	The line showing all bundles of goods that can be purchased at given prices if the entire income is spent.
10.	_____	The change in the consumption of a good that would result if the consumer remained on the original indifference curve after the price of the good changes.
11.	_____	The change in consumption of goods results strictly from the change in purchasing power after the price of a good changes.
12.	________________ _	The sum of the substitution and income effects.
13.	_____	A good for which quantity demanded varies directly with price, causing an upward sloping demand curve.
14.	_____	A list of prices and the corresponding quantity consumers are willing and able to purchase at each price.

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Specific assignment: Mark each statement either True or False. If a statement is false, explain (very briefly) why it is false.

Keynes hypothesized that consumption is positively related to income. True

The marginal propensity to consume, MPC, is measured as changes in consumption over changes in income. True

The MPC is merely the percent of oneâs income that is spent to purchase goods and services. True

The MPC is the slope of the consumption function.

If the MPC is .8, then it may be concluded that the MPS must be .2.

If a personâs income is $10,000 and that person is spending $7,500 on consumption, then it may be concluded that that person has a marginal propensity to save of .25.

The MPC and the MPS must sum to one, meaning that 1 â MPC = MPS

Given a linear (straight-line) consumption function, the MPC must be a constant.

At the point graphically at which the consumption function intersects the 45-degree reference line, the MPC must be equal to 1.

If the consumption function lies above the 45-degree reference line, then there must be negative saving in the economy.

Autonomous consumption is that level of consumption spending that is independent of the level of income.

A change in the level of income will shift the consumption function either upward or downward.

A change in the level of consumer wealth will shift the consumption function either upward or downward.

If the MPC has a positive value, then the MPS must have a negative value.

Saving is defined simply as disposable income minus consumption.

If the consumption function has a slope of 4/5, then the saving function must have a slope of .2.

Any factor that would shift the consumption function upward would shift the saving function upward also.

The average propensity to consume (APC), like the MPC, is simply the slope of the basic, Keynesian consumption function.

Given a typical shaped consumption function, as the level of income rises, the APC rises as well.

If a consumption function graphically starts at a point above the origin (i.e., has a positive vertical axis intercept), then the saving function must begin below the origin.

A dramatic rise in household inflationary expectations could be expected to shift the consumption function downward and the saving function upward.

1.The Phillie Phanatic always eats his ballpark frank in a special way; he uses a foot-long hot dog together with precisely half a bun, 1 ounce of mustard, and 2 ounces of pickle relish. He only gains utility/satisfaction from these 4 items, any extra of a single item without the others is worthless.

What can we say about the relationship among these goods for the Phillie Phanatic and the shape of his indifference curve with respect to these goods?

2. Consider a person with convex indifference curves. When she optimally chooses a consumption bundle of a particular amount of fruit on the Y-axis, and vegetables on the X-axis, her marginal rate of substitution equals:

A. 1

B. PV_/PF (The price of vegetables divided by the price of fruit)

C. P_F/P_V (The price of fruit divided by the price of vegetables)

D. 0

3. A consumer has a budget for food (F) and shelter (S). With income M, and prices PF and PS, the budget constraint for this consumer may be represented as:

A. PSS + PFF = M

B. F = M/PF - (PS/PF)S

C. S = M/PS - (PF/PS)F

D. All of the above

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ECON 1000 Chapter Notes - Chapter 9: Demand Curve, Inferior Good, Normal Good

ECON 1000 Full Course Notes

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