CAS EC 101 Lecture Notes - Lecture 5: Indifference Curve, Budget Constraint, Regional Policy Of The European Union
CHAPTER 10: THE CONSUMER THEORY
Objective 1: Two Factors Involved in a Consumer’s Decision
• Used whenever a consumer needs to make a purchase
• Factors:
o Tastes and Preferences
▪ Analyzed using an indifference curve
o Budget Constraints
Objective 2: Indifference Curves – A rational concept to help show attitudes, preferences about
the goods available to them
• Utility – the happiness/satisfaction/well-being achieved from buying or consuming a
good
o Became the basis for the indifference curve
o Originally measured in utils
o ex:
# of Pizza Slices Consumed
Total Utility
Marginal Utility
0
0 utils
0
1
150 utils
150
2
250 utils
100
3
325 utils
75
4
375 utils
50
5
400 utils
25
• Marginal Utility (MU) – the additional utility you get from one additional unit of a
good/service
o *Marginal = Additional*
o Formula: Marginal Utility of X = MUX = U/X =
• Diminishing Marginal Utility – consuming more units of a good gives less additional util
o Essentially states that for each additional unit consumed the marginal util
decreases
▪ ex: if I have less of good X, MUX is high
▪ ex: if I have more of good X, MUX is low
o Important to note that as more units are consumed total util is still increasing
• Consumption Possibilities
o ex: a man wants to call his girlfriend in France but also wants to call his family at
home
▪ 90 minutes to France = 10 minutes to home = 100 util
▪ 45 minutes to France = 45 minutes to home = 100 util
▪ 10 minutes to France = 90 minutes to home = 100 util
▪ 120 minutes to France = 90 minutes to home = 200 util
• Most ideal option
Objective 3: Principles of Indifference Curves
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• Any point on the indifference curve will give the same amount of util
o
• Every point on an indifference curve is indifferent to every other point on that same curve
• Consumers have an infinite amount of indifference curves
o One for each util level
▪
• Location
o Higher indifference curves (curves further from the origin) represent higher utility
o Lower indifference curves (curves closer to the origin) represent lower utility
o Indifference Curves can never cross as this will pose a contradiction
▪
• Slope
o An indifference curve usually slopes downwards (assuming something will bring
positive util)
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o An indifference curve can sometimes slope upwards (assuming something will
bring negative util)
▪
• In order to accept more of the “bad” you must receive more of the
“good”
• An upwards sloping curve of good X is considered “bad” and will
retract from total util
• Shape
o Indifference curves are usually convex (bowed inwards towards the origin)
o Indifference curves usually flatten out over time (steeper slope higher up the line,
flatter slope lower down the line)
▪
Objective 4: Marginal Rate of Substitution
• Marginal Rate of Substitution MRSYX – measures the amount of good Y (on the y-axis)
you are willing to give up to get one ore unit of good X (on the x-axis)
o Essentially measures the marginal value of receiving one more unit of X
measured in units of Y
o Formula: MRSY,X = MUX/MUY =
o Remember the role of diminishing marginal utility
o ex: what is the MRSHF for this man?
▪ From points A to B, he is willing to give up 10 minutes talking to home in
order to get 1 more minute talking to France
• At point A, MUF is high (~20 utils) but MUH is low (~2 utils)
• MRS = MUF/MUH = 20 utils/2 utils = 10 utils
find more resources at oneclass.com
find more resources at oneclass.com
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CAS EC 101 Full Course Notes
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