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ECON%101%Review&Session!
By#
Casey#Chen# #
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Chapter(6(Consumer(Behaviour(
I.(Marginal(Utility(
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Know!the!general!shape!of!total!utility!curve!and!marginal!utility!curve
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(Gateman,!2012)!
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Law!of!diminishing!marginal!utility!
o Total!utility!increases!at!a!decreasing!rate!after!a!certain!point!
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1!
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II.#Substitution#and#Income#Effects#
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Substitution#effect!is!the!change!in!quantity!demanded!(Qd)!due!to!a!change!in!relative!
price,!holding!real!income!constant!
o It!is!always!negative!!!as!P!falls,!consumer!will!always!substitute!into!the!cheaper!
good!
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Income#effect!is!the!change!in!quantity!demanded!(Qd)!due!to!a!change!in!real!income,!
holding!new!relative!prices!constant#
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Total#Effect#=#Substitution#Effect#+#Income#Effect#
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Normal#good#is!a!good!for!which!the!quantity!demanded!(Qd)!increases!when!income!
rises#
o Increase!income!!!increase!Qd#
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Inferior#good!is!a!good!for!which!the!quantity!demanded!(Qd)!falls!when!income!rises#
o Increase!income!!!decrease!Qd#
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Giffen#good#is!an!inferior!good!for!which!the!income!effect!outweighs!the!substitution!
effect!so!that!the!demand!curve!is!positively!sloped.#
o Increase!price!!!increase!Qd!
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2!
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(p.!129)!
II.#Indifference#Curve#
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Equation!of!budget!line:!PbQb!+!PpQp!=!Y!
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Slope!of!budget!line:!slope!=!maxQy/maxQx!=!Y/Py!/#Y/Px!=!PPx/Py!
o =!Marginal!Rate!of!Transformation!(MRT)!
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Change!in!income!causes!a!parallel!shift!of!the!budget!line!
o An!increase!in!income!shifts!budget!line!to!the!right!
o A!decrease!in!income!shifts!budget!line!to!the!left!
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Change!in!relative!price!rotates!the!budget!line!
o An!increase!in!price!rotates!the!budget!line!in!
o A!decrease!in!price!rotates!the!budget!line!out!
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Equation!of!indifference!curve:!DelX(MUx)!+!DelY(MUy)!=!0!
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Slope!of!indifference!curve:!delY/delX!=!PMUx/MUy!
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o =!Marginal!Rate!of!Substitution!(MRS)!
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Maximization!Condition!
1. Budget!line!tangent!to!indifference!curve!
2. Slope!of!budget!line!=!slope!of!indifference!curve!
3. MRT!=!MRS!
4. –Px/Py!=!PMUx/MUy!
5. MUx/Px!=!MUy/Py!
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(p.!147)!
Chapter#7#Producers#in#the#Short#Run#
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Accounting#Profit#–#Normal#Profit#=#Economic#Profit#
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Normal#Profit#=#Opportunity#Cost#
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TC#=#TFC#+#TVC#
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AC#=#AFC#+#AVC#
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MC#=#0#+#MVC#
4!
Short#Run#Cost#Curves
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(Gateman,!2012)!
Stage!1!
Stage#1#
|!Stage!2!!!
Stage#2#
TC!is!increasing!at!a!decreasing!rate!
TC!is!increasing!at!an!increasing!rate!
AC!is!decreasing!
AC!first!decrease!to!a!minimum,!then!increases!
MC!is!decreasing!
MC!is!increasing!
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5!
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MC#cuts#AC#at#minimum#of#AC#
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(p.!169)!
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6!
Chapter#8#Producers#in#the#Long#Run#
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Total!cost!is!minimized!when!MPK/PK!=!MPN/PN!
o MPK/!MPN!=!PK!/PN!
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SR:!TP!=!f(N,!!)!
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LR:!TP!=!f(N,!K)!
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(p.!179)!
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7!
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(p.!181)!
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(p.!181)!
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8!