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Micro Economics (THEORY OF CONSUMER CHOICE (Indifference Curve…
Micro Economics
THEORY OF CONSUMER CHOICE
Budget Constraint
Relative Price
Consumption bundle
Limit
Utility
Consumer
Optimization
Budget Constraint + Indifference Curve
the
TANGENT
between the two curves
Causes in changes of
CONSUMPTION
due to price
Income Effect
Type of Goods
Normal Good
Income
INCREASE
, Quantity
INCREASE
Inferior Good
Income
INCREASE
, Quantity
DECREASE
SHIFTS THE GRAPH
Substitution Effect
MOVEMENT ALONG THE CURVE
Indifference Curve
Properties
Higher
indifference curves are preferred compared to lower ones
Prefer
MORE THINGS
than to
LESS IT
Downward Sloping
Opportunity Cost
Do Not Cross
SAME
level of satisfaction
Bowed Inward
Trade away goods that they have in
ABUNDANCE
Opportunity Cost
Trade
Same Level Satisfaction
MRS
RATE
at which customers are willing to trade one thing for another
Example of IC
Perfect Substitutes
Fixed Number
Curve is straight line
Perfect Complements
Used
TOGETHER
Add
NO
Additional Satisfaction
Producer theory
Maximizing Profits by production efficiency
q=f(L,K)
;
Isoquants
are different combination of FoP giving same q
Short Run:
K is constant (Fixed Input), L is Variable
MPL=dq/dL
Q=A*f(K,L); Where A engulfs Productivity
C=f(wL+r
K
)
MC=d(C)/dq=
W/MPL
Production Efficiency
MRTS=MPL/w=MPK/r
Long Run
