Microeconomics Revision Flashcards
What is the objective of consumer choice?
Maximise Utility between two goods, X and Y given the budget constraint M (= Px.x + Py.y)
What are the assumptions of the indifference curve?
- Non-satiation: more is better than less
- Transitivity: ranking of goods (if x > y and y > z, then x > z)
- MRS between X and Y declines
Slope of Indifference Curve
MUx/MUy = dy/dx = MRS of XY
If indifference curve cuts another, it violates
Transitivity assumption
Budget Line formula (M)
M = Px . x + Py . y
When is utility maximisation conditon reached?
When indifference curve is tangent to budget line at X0 and Y0 units
Basically when MUx/Px = MUy/Py
What are the types of goods?
- Perfect complements (can’t consume one good without the other, they rely on each other and must be consumed in FIXED PROPORTION)
- Perfect substitutes (either good brings same utility)
Indifference curve of perfect complements
L-shaped IC
Indifference curve of perfect substitutes
Either steeper (consume more X), flatter (more Y), or same slope as budget line (placed precisely on budget line)
Nature of goods
- Normal Good
- Inferior Good
- Giffen Good
Difference with inferior good and giffen good
Yes both are inferior and yes income effect is negative (< 0), but inferior good has |SE| > |IE| and giffen good has |IE| > |SE|
Shape of demand curve for types of goods
- Normal good: downward sloping
- Inferior good: downward sloping (but steeper than normal good)
- Giffen good: upward sloping
Substitution effect
Measures effect of change in price on income (feel relatively richer/poorer than before) and change in quantities bought
e.g. if Px falls, feel richer bc same income can buy more X, hence will buy more X
Income effect
Measures effect when we give back additional income to consumer
Income effect sign in different types of goods
- Normal Good: positive (> 0)
- Inferior Good: negative (< 0)
- Giffen Good: negative (< 0)