AEM 2300 Lecture Notes - Lecture 4: Perfect Competition, Market Power, Economic Surplus
Document Summary
Indifference curve: curve showing all possible points of consumption of two foods which yield an equal level of utility. Negatively sloped - reflects substitutability between goods. Convex (bends away from) origin - reflects diminishing marginal utility. Substitution of one good becomes progressively more expensive. If you only like sb tickets and pizza, it"ll take a lot of pizza to get you to sell the last ticket. Marginal rate of substitution: the amount of one product that a consumer must sacrifice. Is the slope of the ic = what you must give up of one good to get more of another and leave utility unchanged. Consumer"s objective: to maximize utility subject to a budget constraint. X2 = y/p2 - (p1/p2)x1 = budget constraint. Consumer maximizes utility at point a, where: mrs (slope of ic) = mux1/mux2 (ratio of marginal utilities) = p1/p2 (price ratio = slope of budget constraint)