microeconomics chapter 8

What is bounded will-power?

is the less than perfect willpower that prevents us from making a decision that we know, at the time of implementing the decision, we will later regret.

What is bounded self-interest?

is the limited self interests that sometimes results in suppressing our own interests to help others.

What is a utility schedule?

it shows how much of a product or good a person uses each month. this is shown in a table... See page 11 for table

what does a budget line show?

the constraint on consumption choices. You can afford anything below it, and can not afford anything above it. It is a diagonal line on a graph.

What is the controversy in economics?

the goal of economics is to explain the decisions that we observe people make, and not to explain what goes on inside peoples heads

What are the three impediments to rational choice?

1. bounded rationality 2. bounded willpower 3. bounded self-interest

Different decisions are made in different parts of the brain....

1. prefrontal cortex is where memories are stored and data analyzed and might be deemed rational 2. in the hippocampus where memories of anxiety and fear are stored and might be deemed irrational.

The concept of utility helps us understand...

1. why people buy more of a good when its price falls and why people buy more of most goods when their incomes increase.

What is diminishing marginal utility?

As Lisa increases the quantity of soda she drinks, her marginal utility (satisfaction) from each additional soda diminishes.... So the more you drink the lower your satisfaction.... diminishing you marginal utility.

Example of utility schedule...

As Lisa sees more movies in a month, her total utility from movies increases. if lisa sees 2 movies her total utility is 90, if she sees 10 movies her total utility is 275.

Consumer Equilibrium

Choosing the combination that gives the highest total utility.... When a consumer allocate all of their available income in the way that maximizes their total utility. In the example, Lisa's consumer equilibrium is 2 movies and 6 cases of soda a month.see table 8-2

What are consumption choices limited by?

Income... when you spend all your income you reach the limit of your consumption choices

What is a budget line?

It shows the limits of a person's consumption choices.

Examples of a person's consumption choice...

Lisa has $40 to spend on movies and soda. Soda costs $4 a case, movies are $8 each... if she goes to no movies, she can buy 10 cases of soda... if she buys no soda she can go to 5 movies. if she buys 6 cases of soda, she can go to 2 movies. this is shown on a graph with one axis showing the cost of soda and one axis showing the amount of movies. **** see graph on pages 6, 7, 8 chapter 8.

What does choosing at the Margin mean?

Marginal Utility is the increase in total utility that results from consuming one more unit of the good. (Would spending a dollar more or a dollar less on a good bring more total utility?)

Maximizing utility....

Marginal utility from a good decreases as the quantity of the good increases.... example, as the number oof movies seen in a month INCREASES, marginal utility from movies decreases. See table 8-1 and 8-2

What is marginal Utility?

The change in total utility that results from a unit-increase in the quantity of the good consumed... as the quantity consumed of a good increases, the marginal utility from it decreases.

What is the utility-maximizing combination?

The consumer's choice... the assumption is that households choose the consumption that maximizes total utility.

What is the principle of DIMINISHING MARGINAL Utility?

The decrease in marginal utility as the quantity of the good consumed increases.

What happens when there is a rise in income?

The demand for a normal good increases. example... if Lisa's income increases she can buy more soda and movies. Movies and soda are her NORMAL GOODS

What is bounded rationality?

The rationality that is bounded by the computing power of the human brain... faced with uncertainty, consumers can't rationally make choices and instead rely on other decision making methods such as rules of thumb, listening to the views of others, or gut instinct.

What is Neuroeconomics?

The study of the activity of the human brain when a person makes an economic decision.

What is the endowment effect?

The tendency for people to value something more highly simply because they own it.

LOOK at all charts from pages 26 to 41... can't put this in a quiz

These are not hard concepts, but you need to look at graphs.

What is the paradox of value?

Water which is essential to life, is far cheaper than diamonds which are not essential to life. The paradox of value of why water is far cheaper than diamonds is resolved by distinguishing between total utility and marginal utility.

Examples of paradox of value...

We use so much water that the marginal utility from water consumed is small, but the total utility is large. We buy few diamonds, so the marginal utility from diamonds is large but the total utility is small.

What does preferences mean? (consumption choices)

a consumer's likes and dislikes

Utility-Maximizing Choice...What is the Utility Maximizing Rule?

a consumer's total utility is maximized by the rule: 1. spend all available income 2. equalize the marginal utility per dollar for all goods.

What does utility mean?

a persons benefit or satisfaction from consuming a good or service.

Example.... temperature vs utility

both are abstract concepts.... and both have units of measurement that are arbitrary... the concept of utility helps us make predictions about consumption choices in the same way that the concept of temperature helps us to predict when water will turn to ice or steam.

Consumption choices

all the things you can afford to buy

MARGINAL DECISION MAKING IS THE CORE OF THE ECONOMIC WAY OF THINKING.

beside the concept of opportunity cost, marginal reasoning is the MOST important tool for understanding the economic perspective.

most important concept of chapter...

equalizing the marginal utility per dollar across all goods and services maximizes a consumer's utility.

What is behavioral economics?

studies the ways which limits on the human's brains ability to compute and implement rational decisions influence economic behavior.

The Marginal Utility per dollar equals?

the marginal utility from a good divided by its price...See page 23.

What is marginal utility per dollar?

the marginal utility from a good that results from spending ONE MORE DOLLAR on it.

what is total Utility?

the total benefit a person gets from the consumption of goods. Generally, more consumption gives more total utility. the more a person consumes, the more benefit.