Chapter 7 Flashcards
What is utility?
The degree of satisfaction that a household or consumer derives or expects to derive from the consumption of a good or service
What is cardinal utility?
The idea that utility can be measured in some way
What is ordinal utility ?
The ranking of different bundles of consumer goods or services in order of preference
On what assumption is the utility approach to the analysis of consumer behaviour based on ?
The assumption that a consumer can assign values to the amount of satisfaction that he or she obtains from the consumption of each successive unit of a consumer good or service (employs the notion of cardinal utility)
Which notion does the indifference approach employ ?
The notion of ordinal utility, which requires customers to rank only different bundles of goods or services in order of preference
Which notion does the indifference approach employ ?
The notion of ordinal utility, which requires customers to rank only different bundles of goods or services in order of preference
What is marginal utility ?
The extra or additional utility that a consumer derives from the consumption of one additional unit of a good
What is total utility ?
The sum of all the marginal utilities
What does the law of diminishing marginal utility state ?
It states that the marginal utility of a goof or service eventually declines as more of it is consumed during any given period
Measures of MU and TU ?
~ MU declines until it reaches zero and thereafter become negative when identical units of a good are consumed one after the other ( negative utility is called disutility)
~ TU increase as long as MU remains positive. It reaches maximum when MU =0 and then decreases when MU becomes negative
Consumer equilibrium in the utility approach ?
To obtain consumer equilibrium position, we have to determine which combinations are affordable and at which of these combinations, the marginal utility is the same for all the goods in question
