The theory of consumer choice
Utility: the satisfaction or pleasure that a consumer gets from the consumption of a good or service
Total utility: the total satisfaction or pleasure that a consumer gets from the consumption of goods and services
Marginal Utility: measures additional satisfaction obtained from consuming 1 additional unit of goods or services; the change in total utility due to a one-unit increase in the quantity of a good or service
Principle of Diminishing Marginal Utility:The marginal utility of a good or service decreases as the quantity of the good increases, ceteris paribus
Indifference Curve
Shows consumption bundles that give the consumer the same level of satisfaction
properties
Higher indifference curves are preferred to lower ones
Indifference curves are downward-sloping
Indifference curves cannot cross
Indifference curves are bowed inward
Slope
Marginal Rate of Substitution
the rate at which a consumer is willing to trade one good for another
MRS falls as you move down along an indifference curve
Budget constraint
shows the possible combinations of different goods that consumer can buy given her income and the prices of the goods
Slope= -Px/Py
Types of change
PX, PY = const, I changes
I, PY = const, PX changes
I, PX = const, PY changes
Optimization (Utility maximization)
F is consumer’s optimum
Point where indifference curve is tangent to the budget constraint
Best combination of goods available to the consumer
Slope of indifference curve: Equals slope of budget constraint