c3 Flashcards
Choice
Consumers choose the most preferred bundle from their budget sets
Optimal Choice
The optimal consumption position is where the indifference curve is tangent to the budget line
Boundary Optimum
The optimal consumption involves consuming zero units of good 2. The indifference curve is not tangent to the budget line.
Utility
the pleasure or satisfaction that people get from their economic activity
Ceteris paribus assumption
most economists analysis is based on this cateris paribus meaning other thing being equal
Ceteris Paribus Second Assumption
In economic analysis, holding all other factors constant so that only the factor being studied is allowed to change
Utility from consuming two goods
the utility an individual receives from. consuming x and y over some period of time depends on the quantities of x and y consumed and on other things
Preferences
an individuals ranking of options based on their perceive utility or value when they try to make an optimal choice
indifference curve
a curve that shows different combination of two goods where a consumer experiences the same level of satisfaction or utility
perfect substitute
a utility function that describes a production process where inputs can be swapped out for each other at a constant rate
perfect complements
goods that are consumed together in a fixed ratio
budget constraint
the limited amount of income available to consumers to spend on goods and services
budget set
consists of all bundles that are affordable at the given prices and income
marginal rate of substitute
measures the slope of the indifference curve
MRS
the rate at which a consumer is willing to reduce consumption of one good when one gets one more unit of another good
