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Econ 8, 9, 10.docx

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ECON 1000
George Georgopoulos

Ch. 8: Utility and Demand Maximizing Utility  utility: the benefit or satisfaction that a person gets from the consumption of goods and services o total utility: the total benefit that a person gets from the consumption of all the different goods and services; generally more consumption gives more total utility o marginal utility: the change in total utility that results from a one-unit increase in the quantity of a good consumed  diminishing marginal utility: decrease in marginal utility as the quantity of a good consumed increases  Consumer equilibrium: utility-maximizing combination of two or more products  Choosing at the margin: consumer’s total utility is maximized by the following rule o spend all the available income o equalize the marginal utility per dollar for all goods  marginal utility per dollar: marginal utility divided by price  marginal utility from a good obtained by spending one more dollar  utility maximizing rule o MU 1nd MU ar2 the marginal utilities of two products o P1and P2are the prices of the tow products o MU 1P 1 MU /P2 2 o MU 1 MU x 2 /P1 2  Paradox of value o Why is the price of an essential cheaper than the price of a luxury?  Water has low marginal utility but high total utility  Diamonds have high marginal utility but low total utility  Marginal utility per dollar is the same o Water supply is perfectly elastic so quantity consumed is large and consumer surplus is large o Diamond supply is perfectly inelastic so price is high and consumer surplus is low Ch. 9: Possibilities, Preferences, and Choices Consumption Possibilities  Budget line: describes the limits to a household’s consumption choices o any point left of or on the budget line is affordable o any point to the right of the budget line is unaffordable o like a PPF but for consumption  changes in price and changes in income shifting the budget line  Budget equation o Expenditure = Income o P1Q1+ P2Q 2 Y  Q 1 Y/P 1 Q (2 /2 1 o Real income: income expressed as a quantity of goods that a household can afford to buy  At the point where the budget line intersects the y-axis  =Y/P 1 o Relative price: the price of one good divided by the price of another good  =P 2P 1  Opportunity cost Preferences and Indifference Curves  Indifference curve: a line that shows combinations of goods among which a consumer is indifferent
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