1. CONSUMER CHOICE

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Department
Economics
Course
ECO101H1
Professor
Gustavo Indart
Semester
Summer

Description
CONSUMER CHOICE Utility: the satisfaction or well-being that a consumer receives from consuming a good or service Total Utility: the full satisfaction resulting from the consumption of that product by a consumer Marginal Utility: the additional satisfaction resulting from consuming one more unit of that product Equation for marginal utility: dTU/dQ Law of Diminishing Marginal Utility: The utility that any consumer derives from successive units of a particular product consumed over some period of time diminishes as total consumption of the product increases (if the consumption of all other products is unchanged) dMU/dq < 0 Optimal purchase rule: the consumer should purchase units of the commodity until MU = price Budget constraints: if a consumer consumes only two goods, given the prices of the two goods (P X P Y and the consumer’s income (m), the possible quantities purchasable by the consumer (X 0 Y 0 are constrained by P X X P0Y m.Y 0 Budget line: the maximum number of two commodities purchasable by a consumer given the prices of the two commodities and the consumer’s money income Y = m/P - P /P *X Y X Y 0 Since opportunity cost of X = -dY/dX = P /P (= -slope of the budget line) X Y A change in one of the prices causes a rotation of the budget line around the intercept of the commodity whose price is unchanged. A change in income causes a parallel shift in the budget line: an increase in income shifts it out and an decrease income shifts it in. Preferences and Indifference Curves For any two consumption bundles (X , Y ) 0nd 0X , Y ), 1efi1e an individual’s preference ranking of each of the two bundles by 1. (X1, Y1) > (X0, Y0) means the individual prefers (X , Y1) t1 (X , 0 ) 0 2. (X1, Y1) ~ (X0, Y0) means the individual is indifferent between (X
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