Topic 2: Consumer Choice
(1)
Utility
Total utility = satisfaction a consumer gains from consumption of a good
Marginal utility = additional utility a consumer gains from an extra unit of the good
Diminishing marginal utility = utility of successive units goes on diminishing for every
additional unit
Preferences
Preferences = how much consumers like different combinations of goods they
consume
Choice set = set of alternatives available to the consumer
Axioms of choice
Comparison Transitivity Monotonicity
• Consumer can compare 2 • A consumer has • More is better than less
bundles of goods consistent preferences • If A contains more of
• If both goods are liked across different bundles both goods than B, A is
equally = consumer is • If a consumer is preferred to B
indifferent between the indifferent between A
goods and B and indifferent
between A and C she is
also indifferent between
B and C
Indifference curve
• All points on the indifference curve = same amount of utility. Indifference curves join all
points yielding a common level of utility
,Principles of Economics
, Principles of Economics
Consumer Choice (2)
Marginal rate of substitution
• At any point, the slope tells us how much of one good we would be willing to give up to
get one more unit of the other good – concept of diminishing marginal utility
Marginal rate of substitution (MRS) = rate at which consumers are willing to
substitute one good for another
o MRS depends on the marginal utilities of the 2 goods
o MRS = MUX/MUY
The budget constraint
Budget constraint = the set of all bundles that one can afford
Price ratio = the slope of the budget constraint
Changes to the budget constraint
• Change in income = shift of budget curve
• Change in price
o Fall in price of X: maximum consumption of X rises but maximum consumption of
Y is unchanged → only one end of the budget constraint moves → slope changes
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller zackcohen. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for £5.39. You're not tied to anything after your purchase.
