Economics for Business - Lecture 3

Flashcards for Lecture 3

Utility

Satisfaction derived from consuming goods.

Total Utility (TU)

Total satisfaction derived from all units consumed.

Marginal Utility (MU)

Additional satisfaction from consuming one more unit.

MU Computation Formula

Change in Total Utility / Change in Quantity Consumed.

Total Utility Curve

Curve showing total satisfaction, starts at origin, upward sloping.

Marginal Utility Curve

Curve showing the additional satisfaction, downward sloping.

Marginal Utility = 0

Total Utility reaches its peak.

Equi-marginal Principle

Principle where MUX/MUY = PX/PY for optimal good combination.

Indifference Analysis

Analysis that ranks combinations of goods in order of preferences, versus measuring absolute utility.

Indifference Curve

Combinations of goods from which a consumer derives the same amount of satisfaction

Marginal Rate of Substitution (MRS)

Rate at which a consumer will trade one good for another

Formula for MRS

Change in Y / Change in X

Diminishing Marginal Rate of Substitution

Represented by indifference curves that are usually bowed in towards the orgin

Indifference Map

Shows all combinations of X and Y that give a particular level of utility.

Rule of Indifference Curves Regarding Utility

Indifference curves never intersect.

Budget Line

Shows the combinations of goods you can buy given prices and income.

Slope of the Budget Line

The ratio between the prices of two products

Optimum Consumption Point

When the marginal rate of substitution equals the price ratio, i.e. MRS = MUA/MUB = PA/PB

Income Consumption Curve

curve tracing the utility-maximizing combinations of two goods as a consumer's income changes