Economics 1021A/B Study Guide - Real Income, Indifference Curve
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A change in the prices of good changes the slope of the budget line and a change in a consumer's
income shifts the budget line.
Utility is the benefit that someone gets from consuming goods and services.
Marginal utility = utility of current benefit / previous benefit number
A consumer spends the entire budget because more consumption brings more utility and only those
choices that exhaust income can maximize utility.
Marginal utility: total utility that results from consuming one more unit of a good.
Marginal utility = MARGINAL utility/price of the good
equalizes marginal utility per dollar for all goods
Spending all income = equalizes the marginal utility per dollar for all goods
Marginal utility of the second time/price of the good eg. DVDs. DVD is $20, $60 to spend. 50 is
marginal utility. 50/20 = 2.5
To find maximizing utility, find the combo that is equal for both goods
When the last dollar spent on each good gives the same marginal utility, then total utility cannot be
increased by changing the consumption combination.
If price rises, marginal utility does as well.
Prices and Demand:
–If a price of a movie falls, there is movement ON THE DEMAND CURVE. The demand for
video games, the substitute, SHIFTS LEFTWARD.
Paradox of Value
–Why the price of water is low and price of a diamond is high – water is essential, diamonds are
Utility – similar to temperature. Both are abstract and use arbitrary units of measurement.
The magnitude of the slope of the indifference curve is the marginal rate of substitution
*slope of the budget line measures relative price. When income increases and change of price in food
doesn't, the line SHIFTS, but the slope DOES NOT change.
slope = rise/run
magnitude of a slope = relative price