Utility
Satisfaction from consuming a G/S
Law of diminishing MU
MU Decreases as consumption increases
TU and MU graphs
MU is 0 when TU is max
TU increases at a declining rate
MU is neg when TU declines
Consumer behaviour
Explains how consumers allocate their income
- Rational behaviour
- Preferences
- Budget constraint
- Budget management
- Prices
Rational behaviour
Maximise their TU with available income
Budget management
Assumed that consumers will use all of their income - full budget
Utility-maximising rule
Combination of goods that will yield max utility within a budget
Consumer is in equilibrium
Utility-maximising rule
Determine combination using MU/P (WMU) and see if it meets the equation
MUa/Pa=MUb/Pb
Demand curve: income effect
The impact that a change in the price of a product has on the consumers income and ~ quantity demanded of the good
Demand curve: substitution effect
The impact that a change in the price of a product has on its expensiveness (becomes more cheap or expensive relative to other goods) and ~ quantity demanded
Budget line
Shows combos the consumer can buy with their income
Budget line
- Shift: change in income/ change in price of both goods
- Pivot: price of 1 good changes
Indifference curve
Consumer must rank various combinations of 2 goods in terms of preference
Shows combos that yield same TU
Slope at each point =MRS
Indifference curve characteristics
- Downward sloping: inverse relationship between 2 goods
- Convex to the origin: bowed inward to origin of graph
- Never cross
Marginal rate of substitution (MRS)
-is a ratio
Rate at which consumer who possesses the combo will substitute 1 good for another to remain equally satisfied
MRS= #units sacrificed/ #units to get
=Pb/Pa (horizontal/vert.)
MRS decreases as you move down the indifference curve
Equilibrium @tangency
Utility-maximising combo will be the combo lying on the highest attainable indifference curve ~ consumer equilibrium postition
Cardinal utility
“marginal utility theory”
Utility-maximising rule
When utility is numerically measurable
Utility equation
Ordinal utility
“indifference curve approach”
Preferences
Utility is not quantifiable
Ordinal utility
“indifference curve approach”
Preferences
Utility is not quantifiable
