Chapter 5 Flashcards
Difference between wants & needs
needs: are constant, ex. food/water/shelter/clothing
“or else we die”
wants: are unlimited, include everything else, requires choices
Cost-Benefit principle
We undertake an action as long as MB (marginal utility/marginal revenue) is = to or > MC
Why economists find utility and utils useful even though nobody knows what ONE util is
helps us measure utility, utils is an ordinal measurement, which allows comparison of predictions & the prediction of demand
What the decision rule is when deciding how much is to consume of just ONE good
continue until the Marginal Utility (additional satisfaction) = the price of the unit
What is the “law of diminishing marginal utility” and why diminishing marginal utility is OK but
negative marginal utility is not.
The Mu from each additional unit declines as Consumption increases
negative marginal utility = implies harm instead of satisfaction (overconsumption/burnout)
How to find the optimal combination of two goods by using the Rational Spending Rule (the
Total Utility Maximization rule) when provided either total utility or marginal utility and the
price of each good
When provided with Total Utility:
first, find Mu by finding the change in each additional unit
When provided with Mu & price:
Mu/P
marginal utility divided by price
ex. if good A has a marginal utility of 20 and a price of $2, the marginal utility per dollar is 20/2 = 10
Rational Spending Rule
How to spend/allocate our limited income across multiple goods to reach our goal of maximizing total utility
*helps us determine how to improve a situation if the utils per dollar are different across two goods.
Calculate consumer surplus in a graph
the triangle above the market price and below the
demand curve
b*h/2
3 things that can alter MUb /Pb & MUm/Pm
- preferences = change in Mu
- Prices for both b & or m
- Income/budget ( I increases more b and/or more m, I decreases less b and/or less m)
