Economics 2150A/B Lecture Notes - Lecture 3: Marginal Utility, Utility, Indifference Curve
15 Jun 2018
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Econ 2150
Chapter 3 Textbook Notes
Sept. 23 2017
Chapter 3: Consumer Preferences and the Concept of Utility
Representations of Preferences
• Basket/bundle = collection of goods/services an individual might consume
• Consumer preferences tell us how an individual would rank any 2 baskets assuming the
baskets were available at no cost
Assumptions about consumer preferences
• Preferences are complete → the consumer is able to rank any 2 baskets
• Preferences are transitive → consumer makes choices that are consistent with each
other
• More is better
• These assumptions allow us to represent preferences with a UTILITY FUNCTION
o Measures the level of satisfaction a consumer receives from any basket of goods
Ordinal and Cardinal Ranking
• Ordinal rankings = give us info about the ORDER in which a consumer ranks baskets
• Cardial rakigs= gie us ifo aout the INTEN“ITY of a osuer’s preferees
Preferences with a single good: the concept of marginal utility
Marginal Utility
• Ho ill the leel of satisfatio hage ∆U i respose to a hage i the leel of
osuptio ∆
• Marginal utility = the rate at which total utility changes as level of consumption rises
• MU = ∆U/∆
• MU is represented by the slope of the tangent to the utility function at that point
Principle of Diminishing Marginal Utility
• Keep in mind when drawing total and marginal utility curves:
o Total utility and marginal utility cannot be plotted on the same graph
▪ Vertical axis is not the same
o The marginal utility is the slope of the total utility function
o The relationship between total and marginal functions holds for other measure
in economics
• Principle of diminishing marginal utility = after some point, as consumption of a good
incr. the marginal utility of that good will begin to fall
o Ie. The less additional satisfaction we get
find more resources at oneclass.com
find more resources at oneclass.com
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ECON 2150A/B Full Course Notes
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Document Summary
Chapter 3: consumer preferences and the concept of utility. Representations of preferences: basket/bundle = collection of goods/services an individual might consume, consumer preferences tell us how an individual would rank any 2 baskets assuming the baskets were available at no cost. Ordinal and cardinal ranking: ordinal rankings = give us info about the order in which a consumer ranks baskets, cardi(cid:374)al ra(cid:374)ki(cid:374)gs= gi(cid:448)e us i(cid:374)fo a(cid:271)out the inten ity of a (cid:272)o(cid:374)su(cid:373)er"s prefere(cid:374)(cid:272)es. Preferences with a single good: the concept of marginal utility. When does the marginal utility become 0 or even negative. Preferences with multiple goods: marginal utility, indifference curves & marginal rate of. Indifference curves: each curve represents baskets yielding same level of utility these are indifference curves, the consumer would be equally satisfied with all baskets on the curve. Indifference curves have 4 properties: when consumer likes both goods, (both mus are pos. ) all indifference curves have a negative slope.
