Chapters 6 and 7 Flashcards
(13 cards)
What is utility?
quantitative measure of the enjoyment or satisfaction you get from consuming goods and services
What is the consumers goal?
to maximize utility
-things that make you better off- increases utility
-things that make you worse off- decreases utility
What is marginal utility?
(MU)
-The additional satisfaction (utility) from consuming 1 more unit of a good
-The change in total utility from consuming one more unit
At any level of consumption Marginal Utility’s sum to TU
-People always prefer more, as long as MU is (+)
What happens to marginal utility as consumption increases?
It falls!
What is the Law of Diminishing Marginal Utility?
-as consumption increases, marginal utility falls
-a feature of all consumption
What are consumers able to do?
-how do we allocate our limited income across everything we want to buy?
every consumer has to make tradeoffs
*we are constrained by our limited incomes
What is a budget constraint?
all combos of goods a consumer can afford with a limited income
ex: have $40 to spend- pizza is $8 rootbeer is $4
What happens if income changes?
a parallel shift of BC
increase I > shift out
decrease I > shift in
What happens if price of good changes?
BC pivets along the axis of the good where P has changed
P increases > pivot in (toward origin)
P decreases > pivot out (away from origin)
What is the best consumption decision?
consumer equilibrium
-last dollar spent on each good gives some MU
-budget is exhausted
How do consumers benefit from a decrease in price?
-the value of a good purchased mist be at least equal to the P
-along a D curve price is a reflection of your marginal valuation of good
What is marginal valuation?
The $ value to you of the MU derived from consuming an additional unit of the good
