Econ 10A # 1

Budget Constraint

p1x1 + p2x2 = m

Reflexivity

Each bundle of goods is at least as good as itself.

Transitivity

If prefer x to y and y to z, then you must prefer x to z.

Completeness

When you are able to say with certainty that you prefer one bundle to another, or prefer two bundles equally.(must be ranked)

Monotonicity

“More is Better” If you increase the amount of one or both of the goods in a bundle without decreasing either, the new bundle must be preferred to the old bundle.

Averages Preferred to Extremes

Bundles with a decent split of both goods preferred to bundles with almost all of one bundle and little to none of the other.

Normal good

Quantity demanded rises when income rises. (5-star restaurant meals, designer clothes)

Inferior good

Quantity demanded falls as income rises. (“dollar menu”, “lower-quality” goods)

Giffen good (rare)

Demand for good rises when its price increases

Utility Maxmization

Normal or inferior goods

how quantity demanded changes when income changes

Ordinary or Giffen goods

how quantity demanded changes when price changes

MRS

shows the rate at which you are willing to trade one good for another while keeping utility constant.

Marginal utility

additional satisfaction gained from consuming one more unit of good

Diminishing MRS

means that as you consume more of one good x, you are willing to trade less of the other good y to get one more unit of x.

Diminishing MRS indifference curve

Gets flatter, as you move rightward (increase x1).

Hypothesis of Diminishing MRS

Diminishing MRS means that the less of good 1 you have, the more you need to be compensated in good 2 for giving up one unit of good 1

Ordinal utility

A way of representing preferences where only the ranking of bundles matters, not the exact numerical values of utility.

U(x, y) = x^2 + y exhibit diminishing MRS

MRS is −2x, which means that as x increases, the MRS becomes more negative. This actually means that the consumer is willing to trade more of good y for each additional unit of good x as they get more of x, not less.

Strictly diminishing MRS

means the MRS always decreases as you substitute one good for another

Diminishing MRS

allows it to stay the same or decrease — not necessarily strictly.

Maximizing utility

Chooses the best combination of goods they can afford, so that they get the highest possible utility given their budget constraint.

Scale invariant

The function does not change if you scale (or multiply) all its inputs by the same factor.