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ECON 1116 (137)
Chapter 10

02.19.14 Chapter 10.docx

7 Pages

Course Code
ECON 1116
Osborne Jackson

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Chapter 10 Utility and Consumption: Utility: of a consumer is a measure of the satisfaction the consumer derives from consumption of the goods and services. - Utils: measure of utility. Consumption bundle: is the collection of all the goods and services consumed by that individual. Utility function: gives the total utility generated by his or her consumption bundle. (Relationship between individual’s consumption bundle and total amount of utility it generates for that individual. - When people consume, they take into account their preferences and tastes in a more or less rational way. Chapter 10 Marginal utility: of a good or service is the change in total utility generated by consuming one additional unit of that good or service. (the change in total utility from consuming one additional clam). Marginal utility curve: Shows how marginal utility depends on the quantity of a good or service consumed. (constructed by plotting points at the midpoint of the unit interval). - Downwards: each successive clam adds less to total utility than the previous clam. o Not all marginal utility curve slope downwards, but generally accepted that they do, and consumption of most goods or services is subject to diminishing marginal utility. Budgets and Optimal Consumption: Chapter 10 Expenditure on good 1 + Expenditure on good 2 ≤ Total income Budget constraint: requires that the cost of a consumer’s consumption bundle be no more than the consumer’s income. Consumption possibilities: the set of all consumption bundles that can be consumed given the consumer’s income and prevailing prices. Budget line: shows the consumption bundles available to a consumer who spends all of his or her income. Optimal Consumption Bundle: the consumption bundle that maximizes the consumer’s total utility given his or her budget constraint. - Graph below: since he has a limited budget, he must make a trade-off: the more pounds of clams he consumes, the fewer pounds of potatoes, vice versa. He must choose a point on his budget line. Chapter 10 Chapter 10 Marginal Utility per Dollar: spent on a good or service is the additional utility from spending one more dollar on that good or service. How to calculate marginal utility per dollar: Chapter 10 Utility Maximizing principle of marginal analysis: the marginal utility per dollar spent mus
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