𝑃
1. Elasticity = %Change Q/% Change P = 𝑄 ′ (𝑝) ⋅ 𝑄
2. Income = Px*(Qx)+Py*(Qy) (budget Line)
a. As this line flattens, the price of x decreases
3. MRS = |
𝑀𝑈𝑥
|
𝑀𝑈𝑦
a. For Optimization
i. MRS = Px/Py
ii. Quantities Demanded fall on budget line
iii. If MUx/Px > MUy/Py, consumer should inc. x, dec y
b. Diminishing MRS
i. willingness to part with less and less quantity of one good to get one more
additional unit of another good.
Definitions
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Consumer Preferences
o 1. Completeness: Consumers can compare and rank all possible baskets.
o 2. Transitivity: If a consumer prefers basket A to basket B and basket B to basket C, then
the consumer also prefers A to C.
o 3. More is better than less: Consumers always prefer more of any good to less.
Income-Consumption Curve – On an indifference graph, curve traces change in maximizing
market baskets as income changes
o (budget curves shift outward)
Price-Consumption Curve – On an indifference graph, traces utility maximization as price of ONE
good changes
o (x-int shift for only 1 good on budget curve)
Engel Curve – Quantity of good consumed vs. Income
Normal Good – Inc. in income inc. consumption
Inferior Good – Inc. in income dec. consumption (at least at some point)
o Giffen Good – demand increases even
when price rises (no substitute or
alternative)
Consumer surplus is the difference between
the maximum amount a consumer is willing to
pay for a good and what he actually pays for it.