ECON 200

Marshallian Demand

Utility Maximizing Demand (ump)

Homothetic Preferences

Indifference curves are scaled copies of each other

Perfect Substitutes

Goods that are replaceable at a certain fixed ratio ax + by where a and b are the valuations of the items (MRS = a/b)

Perfect Complements

Goods must be consumed at a ratio (L shaped indifference curves)

Slope of Indifference Curve

Negative MRS (-a/b)

Hicksian (compensated) demand

Cost-minimizing demand holding utility fixed (emp)

Indirect Utility Function

Maximum Utility Attainable by current prices and income

Shephard’s Lemma

Hicksian demand equals the derivative of the expenditure function

Roy’s identity

Marshallian demand derived from the indirect utility function

Compensating Variation (cv)

Money needed after a price change to restore original utility

Equivalent Variation

Change in wealth at current prices that would have the same effect as the change in prices with income unchanged

Consumer Surplus

Difference between willingness to pay and payment (found using integral of the demand function from the mkt price on bottom to max wtp price on top)

Substitution Effect

Change in consumption caused solely by price changes

Income Effect

Change caused by change in purchasing power

Slutsky Decomposition + Compensation

Decomposes total effect into the substitution effect and income effect holding purchasing power constant + Income to afford the exact bundle as before if the price of something drops

Hicksian Decomposition + Compensation

Separates Effects while holding utility constant + Income to afford to reach the same level of utility as before the price change