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LU4: THEORY OF CONSUMER CHOICE :check: (2 Extreme Examples of Indifference…
LU4: THEORY OF CONSUMER CHOICE :check:
Indifference Curve
A graph showing combination of two goods that give the consumer equal
satisfaction
and
utility
Utility
The satisfaction a consumer receives from consuming a product
Abundance
Something is a large quantity of it
Examples: People are more willing to trade away goods that they have in abundance and less willing to trade away goods of which they have little
2 Extreme Examples of Indifference Curve
Perfect Substitutes
Utility for both good is same
Examples: Tea and coffee
Same function, property can substitute perfectly with one and another
Perfect Complements
Always used together
Examples: Car and petrol
A good that has to be consumed with another good
Types of goods
Normal goods
Quantity demand rises as consumer income rises
Examples: shoes, clothes
Inferior goods
Increase in income causes a fall in quantity demand
Examples: Low quality of rice
Budget Constraint
When a consumer is limited in consumption "bundles" by a certain income.
"bundles"
the collection of all the goods and services consumed by that individual
Relative Prive
The price of something compared to something else
Price change has 2 effects on consumption
Income effect
The change in consumption that results when s price change moves the consumer to a
higher or lower
indifference curve
Substitutes effect
Shown
along
the subsequent indifference curve rather than the original one