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