Consumer Preferences

Non-satiation

Having more of one or both goods increases utility.

Transitivity

Choice are logical. A>B and B>C mean A>C.

Completeness

Consumers can compare any two bundle of goods and either prefer one or are indifferent.

Convexity

Consumers prefer a more even bundle rather than extremities.

Utility

Measurement of happiness from a bundle. U = f(X,Y)

Marginal Utility

Utility gained from consuming one extra good. MUx = CU/CX

Law of diminishing marginal utility.

As a good is consumed, at one point MU will decrease.

Indifference curve

Graphical line shows all combinations of goods that = same utility.

Marginal rate of substitution

Maximum amount of good Y he will give up for one good X. MRSx,y = MUx/MUy

Budget constraint

Limit of consumption bundles available based on income. PxX+PyY =< I.

Budget line

Graphical curve showing all combinations based on whole budget. PxX + PyY = I

Utility maximisation

Point where he gains maximal utility from budget. IC and budget line are tangent. MRSx,y =Px/Py.

Point price elasticity formula

E = (dQ/dP) x P/Q

Relationship between elasticity and consumer surplus

When prices rise, consumers with a more inelastic demand curve will lose greater consumer surplus and vv.