Chapter 3 Consumer behaviour
Market basket/bundle = List with specific quantities of one or more goods.
Assumptions:
- Completeness: possible to rank
- Transitivity
- More is better than less
- Convexity: indiff. curve is convex when MRS diminishes along the curve.
Perfect substitutes = two goods for which MRS of one for the other is constant. - straight
line.
Perfect complements = Two goods for which the MRS is zero or infinite; indiff. curves are
shaped as right angles.
Utility is used for ranking baskets, the magnitude of difference between markets doesn’t
mean much. We don’t know how much one is preferred to the other.
Ordinal utility function = Utility function that generates a ranking of market baskets in order of
most to least preferred.
Cardinal utility function = utility function describing by how much one market basket is
preferred to another.
Budget constraints = constraints that consumers face as result of limited incomes.
The slope of budget line is negative of ratio of prices of two goods. Magnitude of slope is
rate at which two goods can be substituted. Vertical intercept (I/Pc) is max amount of C that
can be purchased with I. Horizontal intercept (I/Pf) is how many units of F can be purchased
if all income is spent on F.
I = PfF + PcC → C = (I/Pc) - (Pf/Pc)F
Consumer power can double because income doubles or prices fall by half. If prices and
income increase proportionally, budget line doesn’t change.
If consumer chooses one market basket over another and if chosen market basket is more
expensive than alternative then consumer must prefer chosen market basket.
Marginal utility (MU) = additional satisfaction obtained from consuming one additional unit.
Diminishing marginal utility = principle that as more of good is consumed, consumption of
additional amounts will yield smaller additions to utility.
MRS = Pf / Pc
MUf / MUc = Pf / Pc of MUf / Pf = MUc / Pc
Utility maximization is achieved when budget is allocated so that marginal utility per $ of
expenditure is the same for each good.
Equal marginal principle = principle that utility is maximized when consumer has equalized
the marginal utility per dollar of expenditure across all goods.
- Ideal cost-of-living index = represents cost of attaining a given level of utility at
Market basket/bundle = List with specific quantities of one or more goods.
Assumptions:
- Completeness: possible to rank
- Transitivity
- More is better than less
- Convexity: indiff. curve is convex when MRS diminishes along the curve.
Perfect substitutes = two goods for which MRS of one for the other is constant. - straight
line.
Perfect complements = Two goods for which the MRS is zero or infinite; indiff. curves are
shaped as right angles.
Utility is used for ranking baskets, the magnitude of difference between markets doesn’t
mean much. We don’t know how much one is preferred to the other.
Ordinal utility function = Utility function that generates a ranking of market baskets in order of
most to least preferred.
Cardinal utility function = utility function describing by how much one market basket is
preferred to another.
Budget constraints = constraints that consumers face as result of limited incomes.
The slope of budget line is negative of ratio of prices of two goods. Magnitude of slope is
rate at which two goods can be substituted. Vertical intercept (I/Pc) is max amount of C that
can be purchased with I. Horizontal intercept (I/Pf) is how many units of F can be purchased
if all income is spent on F.
I = PfF + PcC → C = (I/Pc) - (Pf/Pc)F
Consumer power can double because income doubles or prices fall by half. If prices and
income increase proportionally, budget line doesn’t change.
If consumer chooses one market basket over another and if chosen market basket is more
expensive than alternative then consumer must prefer chosen market basket.
Marginal utility (MU) = additional satisfaction obtained from consuming one additional unit.
Diminishing marginal utility = principle that as more of good is consumed, consumption of
additional amounts will yield smaller additions to utility.
MRS = Pf / Pc
MUf / MUc = Pf / Pc of MUf / Pf = MUc / Pc
Utility maximization is achieved when budget is allocated so that marginal utility per $ of
expenditure is the same for each good.
Equal marginal principle = principle that utility is maximized when consumer has equalized
the marginal utility per dollar of expenditure across all goods.
- Ideal cost-of-living index = represents cost of attaining a given level of utility at
