ECON102, WEEK 3 Flashcards
What does the demand curve reflect?
Consumer behaviour and willingness to purchase at different prices.
What does the supply curve reflect?
Producer behaviour and willingness to supply at different prices.
Does a change in price shift the demand curve?
No. It causes a movement along the curve.
What is a consumption bundle?
A list of quantities of all goods a consumer might purchase.
Example of a numerical bundle (2,5,1)?
2 bananas, 5 coconuts, 1 fish.
What does A > B mean?
A is strictly preferred to B.
What does A ≥ B mean?
A is weakly preferred to B (could be strictly or indifferent).
What does A ~ B mean?
The consumer is indifferent between A and B.
What is utility?
Satisfaction from consuming a good or service.
What is marginal utility (MU)?
Extra satisfaction from consuming one additional unit.
What does diminishing marginal utility mean?
Each extra unit gives less satisfaction than the one before.
If U(X) > U(Y), what does that mean?
Bundle X is strictly preferred to Y.
Name 3 assumptions of utility theory.
Completeness, Transitivity, Non-Satiation (more is better).
What does ordinal utility tell us?
The ranking of preferences only.
What does cardinal utility tell us?
The strength of preferences (not used in standard micro theory).
What is an indifference curve?
A curve showing all bundles that give the same utility.
What does it mean if two bundles lie on the same indifference curve?
The consumer is indifferent between them.
Utility function U(Xp, Xc) = Xp × Xc. What’s the utility of (3,4)?
12
What is MRS?
The rate at which a consumer is willing to give up one good for another while maintaining the same utility.
Formula for MRS between goods 1 and 2?
MRS₁,₂ = MU₁ / MU₂
If MU of pizza = 4 and MU of coke = 3, what is MRS?
4/3 → willing to give up 1.33 cokes for 1 pizza.
What is the budget constraint equation?
P₁X₁ + P₂X₂ ≤ M
What does the budget line represent?
All combinations that exactly use up income.
What happens if income increases?
The budget line shifts outward (parallel).
What happens if the price of one good increases?
The budget line pivots inward from that axis.
What is the condition for optimal consumption?
MU₁/P₁ = MU₂/P₂
If MU₁/P₁ > MU₂/P₂, what should the consumer do?
Buy more of Good 1 and less of Good 2.
What does the optimal bundle represent on a graph?
The point where the budget line is tangent to the highest indifference curve.
