Consumer's Equilibrium Lecture Flashcards

These vocabulary flashcards cover the fundamental concepts of Consumer's Equilibrium, including Utility Analysis (Cardinal approach), Indifference Curve Analysis (Ordinal approach), and Budget Line properties as presented in the Microeconomics lecture.

Utility

The want satisfying power of a commodity, measured in terms of utile or utils.

Marginal Utility (MU)

The additional utility obtained from the consumption of an additional unit of a commodity; calculated as $MU = \frac{\Delta TU}{\Delta Q}$ or $MU_n = TU_n - TU_{n-1}$.

Total Utility (TU)

The cumulative sum total of marginal utility derived from consuming a specific quantity of a commodity; $TU = \sum MU$.

Law of Diminishing Marginal Utility

A law stating that as more units of a commodity are consumed, the marginal utility (MU) obtained from each successive unit declines.

Gossen's First Law of Consumption

Another name for the Law of Diminishing Marginal Utility.

Point of Satiety

The point of maximum satisfaction where marginal utility is zero ($MU = 0$) and total utility ($TU$) is at its maximum.

Consumer Equilibrium

A situation where a consumer maximizes their total utility out of their given income and has no tendency to change their level of consumption.

Marginal Utility of Money ($MU_m$)

The worth of a rupee to a consumer; it is assumed to remain constant in utility analysis.

Equilibrium Condition (Single Commodity)

The state where Marginal Utility in terms of money equals the price of the good: $\frac{MU_x}{P_x} = MU_m$.

Law of Equi-Marginal Utility

Also known as Gossen's Second Law, it states that a consumer is in equilibrium when the ratio of MU of different goods to their respective prices is equal: $\frac{MU_x}{P_x} = \frac{MU_y}{P_y} = MU_m$.

Rational Consumer

A consumer who always seeks to maximize their total utility from their limited income.

Cardinal Utility Analysis

A theory given by Alfred Marshall stating that utility can be expressed and calculated numerically.

Ordinal Utility Analysis

Also known as Indifference Curve Analysis or Hicksian Analysis (by J. R. Hicks), it states that utility cannot be expressed numerically but can be ranked.

Budget Line

A line showing various combinations of two goods that a consumer can afford by spending their entire total income; also known as the Price Line.

Budget Line Equation

The mathematical representation of the budget line: $P_x \cdot Q_x + P_y \cdot Q_y = M$, where $M$ is money income.

Slope of Budget Line

The Market Rate of Exchange (MRE) or Price Ratio, expressed as $\frac{P_x}{P_y}$.

Budget Set

All possible combinations of two goods that a consumer can afford given their income and prices: $P_x \cdot x + P_y \cdot y \le M$.

Indifference Curve (IC)

A curve showing different combinations of two goods that provide the consumer with the same level of satisfaction (utility).

Marginal Rate of Substitution (MRS)

The rate at which a consumer is willing to sacrifice units of one good for an additional unit of another good while maintaining the same satisfaction level: $MRS = \frac{\Delta Y}{\Delta X}$.

Monotonic Preference

A preference where the consumer always prefers a bundle that has more of at least one good and no less of the other good ("more is better").

Indifference Map

A collection or family of indifference curves in a single diagram, where higher curves represent higher levels of satisfaction.

Conditions of Equilibrium (IC Analysis)

1. Budget line must be tangent to the Indifference Curve ($MRS_{xy} = \frac{P_x}{P_y}$). 2. Indifference Curve must be convex to the point of origin.