CAS EC 101 Lecture Notes - Lecture 5: Indifference Curve, Budget Constraint, Regional Policy Of The European Union

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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
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CAS EC 101 Full Course Notes
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