Topic 4 Flashcards
How can you illustrate a consumer’s preference among consumption bundles?
Indifference curves
What does the theory of consumer choice address?
Do all demand curves slope downwards?
How do wages affect labour supply?
How do interest rates affect household saving?
What is an indifference curve?
It shows consumption bundles that give the consumer the same level of utility
What is utility?
It is a measure of satisfaction
Represented by the utility function U=U(x,y)
What are the two concepts of utility?
Cardinal and ordinal
What is cardinal utility?
Believed it can be measured like a length using utils
What is marginal utility?
The extra utility gained from additional amounts of the good.
For every extra unit we consume the extra utility becomes less and less
Marginal utility of x may be defined as…
The change in total utility following an infinitely small change in the amount of x consumer
Which of cardinal and marginal do economists prefer to use?
Ordinal utility
What is ordinal utility?
Cannot assign a numerical value to utility but can order in terms of what you prefer
Implies you don’t know the magnitude of marginal utility
What is the marginal rate of substitution?
The slope at any point on an indifference curve is the MRS
What is the equation for the slope of an indifference curve?
-MUx/MUy
What are the four properties of indifference curves?
1) higher are prefered to lower
2) indifference curves are downward sloping
3) indifference curves do not cross
4) usually bowed inwards (convex to the origin
What are the two extreme cases where the indifference curves are not bowed inwards?
Perfect substitutes and complements
What does an indifference curve for perfect substitutes look like?
Straight lines
Marginal rate of substation is a fixed number
