slide 6 Flashcards
the choices you make as a buyer is influenced by many factors, what are the two things it can be summarized as
- consumption possibilities
- preferences
what does the budget line illustrate
the limits of the consumption possibilities which is restricted by income, and the price of the two goods
what is the definition of utility
it is the benefit or satisfaction from consuming a good
true or false: more consumption gives more utility
(total utility increases as quantity of good increases)
true, we are never fully satisfied to the point where we don’t want more
Define marginal utility
the amount of utility gained from consuming one more unit of good
define the principle of diminishing marginal utility
as the quantity of goods increase, the marginal utility from it decreases
define utility-maximizing choice
it is the choice the consumer should make to obtain the max. utility/satisfaction
what is the spreadsheet solution of utility maximizing
create a table of consumption possibilities, find total utility for every combination and select the largest total utiltiy
define consumer equailibrium
is is when a consumer has allocated all their available income in a way that maximized total utiltiy
describe the more natural way to find consumer equilibrium
the consumer should spend their next dollar on the thing that gives them the most marginal utility. This allows the consumer to decide while spending rather than deciding in advance.
we compare the marginal utility per dollar of both goods we can determine the best way to maximize total utility. The max. will be when marginal utility per dollar for the goods are equal
define the marginal utility per dollar
what is its formula
is is the marginal utility from a good that results from spending one more dollar on it
marginal utility per dollar equals the marginal utility divided by its price
how does the fall in price of a good affect marginal utility
when the price falls, demand increases, so when the price falls the marginal utility per dollar increases.
how does the rise in the price of a good affect marginal utility
when prices rise, MU/P falls
how does a rise in income change marginal utility
if is is anormal good, the demand will increase. and she will buy more, when she buys more we have to relocate the point of maximum utility
how do you maximize the consumer equilibrium the more natural way (not spreadsheet solution)
by comparing the marginal utility per dollar for each good, you can find the way that maximizes total utility, we want the MU/P to be equal in both goods to have maximum utility
