L1 demand 2026

About this deck

This deck includes 65 flashcards covering utility maximization, marginal utility, indifference curves, and related concepts. Use it to review key Economics ideas, focus on weak cards, and prepare for your exam with StudyLess.

1. 01

   What are the three core assumptions about consumer preferences for modeling demand?

   Comparability (can compare any two options), Consistency (preferences don't contradict), and Stability to small changes (no abrupt reversals).

2. 02

   What does 'preferences are complete' mean in the axioms of rational choice?

   It means a consumer can rank all possible choices from most to least desirable (can rank any two choices).

3. 03

   What does 'transitivity' mean in the axioms of rational choice?

   If A is preferred to B, and B is preferred to C, then A must be preferred to C (no cycles).

4. 04

   What is ordinal utility?

   Ordinal utility gives information on the ranking of options, indicating which is preferred but not by how much.

5. 05

   What is cardinal utility?

   Cardinal utility quantifies how much a consumer likes an option (measured in 'utils').

6. 06

   For exposition, which type of utility do economists typically assume?

   Cardinal utility, although ordinal utility is often sufficient for understanding choices.

7. 07

   What is the general form of a utility function for N goods?

   U(x1, x2, ..., xN; other things), where xi are quantities of goods and 'other things' are held constant.

8. 08

   When studying concepts, how many goods are often focused on in utility analysis?

   Two goods, represented as U(x, y).

9. 09

   Define Marginal Utility (MU).

   Marginal utility (MU) describes how much total utility changes as one more unit of a specific good (xi) is consumed.

10. 10

    What is the assumption for normal goods regarding marginal utility?

    For normal goods, more is better, meaning the partial derivative of utility with respect to the good is positive (∂U/∂xi > 0).

11. 11

    Define Diminishing Marginal Utility.

    The marginal utility from consuming an additional unit of a good decreases as consumption of that good increases (∂²U/∂xi² < 0).

12. 12

    What does the second graph (b) in the Diminishing Marginal Utility figure show?

    It shows the marginal utility (MUy) decreasing as weekly consumption (y) increases, illustrating the diminishing marginal utility concept.

13. 13

    What is the consumer's goal regarding budget allocation between two goods?

    To allocate a limited budget between goods to maximize utility, exchanging goods until no further combination increases utility.

14. 14

    What is an indifference curve?

    An indifference curve shows a set of consumption bundles that provide the same level of utility to an individual, meaning they are indifferent between them.

15. 15

    How are indifference curves typically represented graphically for two goods?

    As a curve on a graph with quantity of good x on the horizontal axis and quantity of good y on the vertical axis.

16. 16

    What does it mean if an indifference curve is farther from the origin?

    It represents a higher level of utility, as it implies consuming more of at least one good while not consuming less of the other (for normal goods).

17. 17

    Why are indifference curves negatively sloped?

    To maintain the same level of utility, if a consumer gets more of one good, they must get less of the other.

18. 18

    Why can't two indifference curves intersect?

    Intersection would violate the transitivity axiom of rational choice.

19. 19

    What does it mean for indifference curves to be convex to the origin?

    It means consumers are progressively less willing to trade away good y to get more of good x, reflecting diminishing marginal rate of substitution.

20. 20

    Define the Marginal Rate of Substitution (MRS).

    The MRS is the rate at which a consumer is willing to trade one good for another while maintaining the same level of utility. It's the negative of the slope of the indifference curve.

21. 21

    What is the relationship between MRS and marginal utilities?

    MRS(x,y) = MUx / MUy, meaning the MRS is equal to the ratio of the marginal utilities of the two goods.

22. 22

    What does a decreasing MRS imply about consumer preferences?

    It implies 'average bundles are better than extreme ones,' also known as convex preferences.

23. 23

    What is the budget constraint equation for two goods, x and y, with budget I and prices Px and Py?

    Px*x + Py*y ≤ I

24. 24

    What is the slope of the budget line?

    The slope of the budget line is -Px / Py, representing the rate at which good x can be traded for good y.

25. 25

    At the point of utility maximization (optimum), what is the relationship between the slope of the budget line and the slope of the indifference curve?

    At the optimum, the slope of the budget line equals the slope of the indifference curve (Px/Py = MRS(x,y)).

26. 26

    What is the condition for an interior solution in utility maximization?

    The first-order conditions (FOCs) are met, where the ratio of marginal utilities equals the ratio of prices (MRS = Px/Py).

27. 27

    What is a corner solution in utility maximization?

    A corner solution occurs when the optimal bundle involves consuming zero of one of the goods, and the MRS does not equal the price ratio at that point.

28. 28

    What is the objective of an individual in the utility maximization problem?

    To maximize utility from consuming N goods, subject to their budget constraint.

29. 29

    How is the utility maximization problem typically solved mathematically?

    Using the Lagrange expression: L = U(x1,..., xN) + λ(I - Σpixi).

30. 30

    What do the first-order conditions (FOCs) of the Lagrangian represent?

    They represent the necessary conditions for an interior solution, setting partial derivatives to zero.

31. 31

    What is the interpretation of the Lagrange multiplier (λ) in utility maximization?

    λ represents the increase in utility (objective function value) for a one-unit increase in the budget constraint (I).

32. 32

    What are demand functions?

    Demand functions express the optimal quantity of a good consumed as a function of prices of all goods and the individual's budget (e.g., x* = xi(p1, ..., pN, I)).

33. 33

    What is the property of 'money illusion' in demand functions?

    Demand is homogeneous of degree zero, meaning optimal quantities remain unchanged if all prices and the budget are multiplied by the same factor (t).

34. 34

    What happens to consumption of normal goods when the budget (I) increases, keeping prices fixed?

    Consumption of all normal goods increases (∂xi/∂I > 0).

35. 35

    What happens to the budget line when the price of one good changes, ceteris paribus?

    The intercept on the axis of the changed good changes, and the slope of the budget line changes.

36. 36

    What are the two effects that explain the change in consumption when a price changes?

    The substitution effect (moving along the same indifference curve) and the income effect (moving to a new indifference curve).

37. 37

    How is the individual's demand curve constructed?

    By holding all other prices and the budget constant and varying the price of one good to see how the optimal quantity changes.

38. 38

    What does a movement *along* the demand curve represent?

    A change in the quantity demanded due to a change in the good's own price.

39. 39

    What does a *shift* in the demand curve represent?

    A change in demand due to factors other than the good's own price, such as changes in budget, other prices, or preferences.

40. 40

    What is the difference between compensated and uncompensated demand curves?

    Uncompensated demand curves (standard) are in nominal terms of prices and budget; compensated demand curves express things in real terms.

41. 41

    What is the own-price effect for normal goods?

    As the price of a good increases, its own consumption decreases (∂xi/∂px < 0).

42. 42

    Define substitutes in consumption.

    Two goods are substitutes if an increase in the price of one leads to an increase in the consumption of the other (∂x/∂py > 0).

43. 43

    Define complements in consumption.

    Two goods are complements if an increase in the price of one leads to a decrease in the consumption of the other (∂x/∂py < 0).

44. 44

    What is the pricing principle for a multiproduct firm selling substitutes?

    The firm will optimally price higher than separate single-product firms would, as a price increase pushes customers to other products within the firm's portfolio.

45. 45

    What is the pricing principle for a multiproduct firm selling complements?

    The firm will optimally price lower than a single-product firm would, as raising the price of one good reduces demand for its complement.

46. 46

    Why do firms create substitute product lines?

    For market segmentation (capture different customer types) and competitive defense (cannibalize own sales rather than let competitors do it).

47. 47

    What is the strategic implication for a firm when selling complements?

    Acquire or control the complements to align incentives and avoid misaligned incentives.

48. 48

    How does the relationship between products (substitutes vs. complements) affect pricing for multiproduct firms?

    For substitutes, firms price more aggressively (higher); for complements, they price less aggressively (lower).

49. 49

    How can managers influence consumer choice beyond setting a linear price?

    By shaping the choice environment using non-linear budget sets like coupons, quantity discounts, bundles, and loyalty programs.

50. 50

    How does a coupon offering a discount after a minimum spending threshold affect the budget line?

    The budget line remains the same up to the threshold, then shifts outwards, allowing for higher total spending at the higher part.

51. 51

    Why would managers offer quantity discounts?

    Due to diminishing marginal utility; consumers are willing to pay more for the first units, but managers must lower the price per unit for subsequent units to entice further purchase.

52. 52

    What is the core concept of utility maximization?

    Maximizing utility subject to a budget constraint, where the optimal bundle is typically where the indifference curve is tangent to the budget line.

53. 53

    What is the condition for utility maximization at an interior solution?

    The marginal rate of substitution (MRS) equals the ratio of prices (MRS = Px/Py).

54. 54

    What is the definition of a utility function?

    A mathematical function that represents the preferences of a consumer, assigning a numerical value (utility) to different consumption bundles.

55. 55

    What does the Cobb-Douglas utility function U = x^α * y^β represent?

    It's a common form of utility function where α and β determine the relative importance of goods x and y, and it satisfies diminishing MRS.

56. 56

    What is a key property of the Cobb-Douglas solution for demand?

    It delivers closed-form solutions and constant budget shares for each good (e.g., a proportion α of the budget is always spent on good x).

57. 57

    What is a limitation of the Cobb-Douglas model regarding budget shares?

    It assumes constant budget shares, which is unrealistic as spending on necessities often falls proportionally as income rises, while spending on luxuries rises.

58. 58

    What is the difference between a shift in demand and a movement along the demand curve?

    A movement along the curve is caused by a change in the good's own price; a shift is caused by changes in budget, other prices, or preferences.

59. 59

    What is the 'lump sum principle' in taxation/subsidization?

    Governments should tax or subsidize total income/budget rather than specific goods to avoid distorting consumer choices (Umax).

60. 60

    What is the relationship between MRS and the ratio of prices at the optimal bundle?

    At the optimum, MRS = Px/Py, meaning the rate of willingness to trade goods equals the rate at which they can be traded in the market.

61. 61

    What does it mean for demand to be homogeneous of degree zero?

    If all prices and the budget are scaled by the same factor, the optimal quantities demanded do not change.

62. 62

    What are the two main effects that explain how a price change affects consumption?

    Substitution effect (consumer stays on the same indifference curve) and income effect (consumer moves to a different indifference curve).

63. 63

    What is the difference between gross complements and gross substitutes in terms of cross-price effects?

    Gross complements: price of y increases -> consumption of x decreases (opposite directions). Gross substitutes: price of y increases -> consumption of x increases (same direction).

64. 64

    How does a multiproduct firm's pricing strategy differ when selling substitutes versus complements?

    Substitutes: price higher than single-product firm. Complements: price lower than single-product firm.

65. 65

    What is the 'choice architecture perspective' in managerial influence?

    Understanding how managers can design the environment (e.g., pricing structures) to influence consumer choices and move them to different points on their indifference maps.