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Foundations (Functions (Utility Functions (Assumptions:
Non-satiation…
Foundations
Functions
Utility Functions
Assumptions:
- Non-satiation (more is better, first derivative is positive)
- Diminishing marginal utility (second derivative is negative)
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Marginal Rate of Substitution: Rate at which consumers are willing to trade 1 good for another
- MRS is the marginal utility of consumption of one good, to the marginal utility of consumption of another good
Indifference Curve
Curve containing the set of consumption bundles from which the consumer obtains the same level of utility
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Demand Curves
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Welfare Measures
- Compensating variation (CV): What change in income would restore consumer's wellbeing to what it was before the price change
- Equivalent variation (EV): What change in consumer's income would have equal effect on the consumer's wellbeing as the price change
- Change in consumer's surplus
If there are no income effects, CV = EV = Change in CS.
For normal good, CV > Change in CS > EV.
For inferior good, CV < Change in CS < EV.
Supply Curves
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In an equilibrium, firm supplies the good until the price they can obtain equals the MC of production.
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