THEORY OF CONSUMER BEHAVIOUR
Q) What is cardinal utility analysis?
Answer: An approach that assumes utility can be quantified and measured in numbers.
Q) What is total utility?
Answer: The total satisfaction derived from consuming a good or service.
Q) What is marginal utility?
Answer: The additional satisfaction derived from consuming one more unit of a good or service.
Q) What is the law of diminishing marginal utility?
Answer: The principle that as you consume more of a good, the additional satisfaction you get from each unit decreases.
Q) What is ordinal utility analysis?
Answer: An approach that recognizes consumers can rank different bundles of goods but cannot quantify their utility in numbers.
Q) What is an indifference curve?
Answer: A curve that shows all the combinations of two goods that provide the same level of satisfaction to the consumer.
Q) What is the marginal rate of substitution?
Answer: The rate at which a consumer is willing to trade one good for another while maintaining the same level of satisfaction.
Q) What is the consumer's budget?
Answer: The income the consumer has available to spend on goods and services.
Q) What is the budget line?
Answer: A line that shows all the combinations of two goods that the consumer can afford given their income and prices.
Q) How do changes in income affect the budget line?
Answer: An increase in income shifts the budget line outwards, while a decrease shifts it inwards.
Q) How do changes in prices affect the budget line?
Answer: A change in the price of one good will pivot the budget line.
Q) What is the consumer's optimum?
Answer: The point on the budget line where the consumer gets the most satisfaction from their limited budget.
Q) How is the demand curve for a good derived?
Answer: By connecting the consumer's optimal choices at different prices.
Q) What is the law of demand?
Answer: The principle that the quantity demanded of a good generally decreases as its price increases.
Q) What are some factors that can affect the demand curve?
Answer: Changes in income, prices of related goods, consumer preferences, and expectations.
Q) What is the difference between cardinal and ordinal utility?
Answer: Cardinal utility assumes measurable quantities, while ordinal utility only assumes rankings.
Q) What is the role of indifference curves in consumer theory?
Answer: They help illustrate the consumer's preferences and optimal choices.
Q) How does the budget line constrain the consumer's choices?
Answer: It limits the combinations of goods the consumer can afford.
Q) What is the relationship between the budget line and the consumer's optimum?
Answer: The optimum is the point where the budget line touches the highest attainable indifference curve.
Q) How can changes in income or prices be analyzed using consumer theory?
Answer: By observing how they shift the budget line and affect the consumer's optimum.
Q) What is the key factor influencing a consumer's choice?
Answer: Maximizing satisfaction within their budget and price constraints.
Q) What are the main concepts used to analyze consumer choices?
Answer: Utility, marginal utility, and budget line.
Q) How does the law of demand relate to price?
Answer: As price increases, demand generally decreases.
Q) What are two factors affecting the price elasticity of demand?
Answer: Availability of substitutes and the nature of the good (necessity vs. luxury).
Q) What is the difference between the income effect and the substitution effect?
Answer: The income effect describes how a change in income affects demand, while the substitution effect describes how a change in price leads consumers to switch to cheaper alternatives.
Q) What are two types of related goods that affect demand?
Answer: Complements (e.g., tea and sugar) and substitutes (e.g., tea and coffee).
Q) What can cause the demand curve to shift?
Answer: Changes in income, prices of other goods, and consumer preferences.
Q) How is market demand derived?
Answer: By adding up the individual demand curves of all consumers in the market.
Q) What does price elasticity of demand measure?
Answer: The responsiveness of demand for a good to changes in its price.
Q) How does price elasticity affect expenditure on a good?
Answer: If demand is price-elastic, expenditure decreases with a price increase. Conversely, if demand is price-inelastic, expenditure increases with a price increase.
