Chapter 2 Flashcards
Assumption 1: Completeness assumption
A consumer, when confronted with any two bundles, can tell us which one she prefers, or whether she is indifferent between them.
Assumption two: Transitivity assumption
Preferences are such that if bundle X is preferred to bundle Y, and bundle why is preferred to bundle Z, then X is preferred to Z.
Assumption 3: non-satiation
More is better.
Indifference curve
The set of all bundles among which a consumer is indifferent.
Marginal rate of substitution (MRS)
The negative of the slope of an indifference curve; it measures the rate of which the consumer is willing to trade one good for the other.
Diminishing marginal rate of substitution
When the marginal rate of substitution falls as we move down along an indifference curve.
Indifference map
The entire collection of indifference curves.
Perfect substitutes
Goods that can be substituted for each other at a constant rate, that is, that have a constant marginal rate of substitution.
Perfect compliments
Goods that have to be consumed and fix proportions.
Total utility
The total satisfaction, sometimes given by a numerical score, of consuming a particular commodity bundle.
Utility function
A formula showing the total utility associated with each commodity bundle.
Ordinal utility function
A utility function, allowing the ranking of bundles by their amount of utility, but not precise comparisons of how various bundles are valued relative to each other.
Cardinal utility function
The values of the utility function tell us exactly how much better some commodity bundles are than other bundles.
Price taker
Consumer, whose price per unit of a commodity is not affected by the number of units purchased.
Budget constraint
The representation of the bundles among which it consumer may choose given her income and the price is she faces.
