Class Notes (835,760)
Canada (509,376)
Economics (318)
ECON 201 (72)

ECON 201 Consumer theory 9 oct.docx

3 Pages
Unlock Document

ECON 201
Ronald Schlenker

ECON 201 – 9 October CONSUMER THEORY 1. Objective – to determine how a consumer will behave, given income & the prices of commodities 2. Utility analysis a. Utility - amount of satisfaction a consumer obtains from consumption b. Assumption – utility is numerically measurable =>’utils’ c. Problem – assumption is unrealistic 3. Indifference Curve (IC) analysis a. Assumption i. Utility is ordinarily measurable ii. Indifference between bundles may exist iii. More is preferred to less b. IC definition – a curve showing combinations of 2 goods that give the consumer the same level of satisfaction Example: Pieces of pizza Bottles of beer 8 1 5 2 3 3 2 4 (cf graphe) c. Marginal rate of substitution (MRS) – the rate at which a consumer is willing to trade one good for another whil staying at the same level of satisfaction  MRS is the slope of an IC d. Properties i. Downward sloping ii. Convex to origin (bowed inward)  MRS decreases going left to origin  Issue of relative scarcity iii. ICs further from origin preferred to those closer to origin (cf graphe) e. ICmax – set of ICs i. ICs are individualized ii. ICs cannot be summed iii. If tasks change, ICs change 4. Buget Line (BL) a. Example Tom’s prices Pbeer = 2.5$ /bottle Ppizza= 1$ / piece My wallet has 10$ (cf graphe) b. General case – goods X and Y, prices Px and Py & budget B i. X intercept = B/Px ii. Y intercept = B/Py iii. All points on or below BL are affordable iv. All points above or to right of BL are unaffordable v. Assume all of budget is spent vi. Slope of BL = dQy/qQx=…= -Px/Py (relative price ratio) 5. Consumer Equilibrium – maximize Satisfaction subject to the budget constraint (f graphe) Optimal- occurs at tangency between the BL & an IC Slope of BL = slope of IC => -Px/Py = MRS 6. Changes in Income a. Example – I find $10 on the street (translation de la droite correspondant a l’augmentation du budget de 10$) b. BL shifts in parallel shift i. Income increase => BL shifts right ii. Income decrease => BL shifts left c. General case => start with B, Px, Py , then budget doubles, then triple..( cf graphe) d. Income consumption Curve (ICC) – connects equilibrium when income cha
More Less

Related notes for ECON 201

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.