Supply, Demand & Market Equilibrium Principles of Microeconomics Boris Nikolaev.
Consumer Choice Theory Principles of Microeconomics 2023 Boris Nikolaev.
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Transcript of Consumer Choice Theory Principles of Microeconomics 2023 Boris Nikolaev.
Utility Analysis
Utility = happiness (satisfaction from consumption)
1. subjective.
2. hard to measure.
3. preferences are stable.
The Law of Diminishing Marginal Utility
# of units consumed Total Utility (TU) Marginal Utility (MU)
0 0
1 10
2 8
3 2
4 0
5 -2
Marginal Utility: utility from consuming one more unit of the good.
Total Utility: utility from consumption so far.
The ModelTwo goods: X, Y px = price of x px =price of y
How much X, Y should you consume?
U =f(X,Y) utility function
The budget constraint
PreferencesWe use indifference curves to measure preferences.
= all combinations of x, y that makes you equally happy.
Properties of indifference curves
1. As you consume more (go NE) you become happier.
2. There are infinitely many indifference curves (they never intersect).
3. Downward sloping (convex shape)
Marginal Rate of Substitution
MRS = - slope of ind. curve
Minimum amount of good y you would accept in a trade for one unit of good x