ECON 11 (THEORY OF CONSUMER BEHAVIOR)

THE ORDINAL UTILITY THEORY (utility is measurable in an ORDINAL sense)

ORDINAL UTILITY APPROACH - does not assign values, instead works with a ranking or preferences

MARGINAL UTILITY (MU)

additional satisfaction that an individual derives fron consuming an additional unit of good and service. MU= ΔTU/ΔQ

UTILITY

amount of satisfaction derived from the consumption of commodity UTILS-measurement unit

MARGINAL RATE OF SUBSTITUTION

rate at which the consumer is willing to substitute one good for the other

BUDGET CONSTRAINT

representation of the combination of goods and services that a consumer may purchase, given current prices within her given income

INDIFFERENCE CURVE

the REPRESENTATION of potentially observable DEMAND PATTERNS for individual consumers over commodity bundles

4 PROPERTIES OF INDIFFERENCE CURVES

1. Higher indifference curves are preferred to lower ones 2. Indifference curves are downward sloping 3. Indifference curves do not cross 4. Indifference curves are bowed inward

PRINCIPAL ASSUMPTION

A consumer attempts to allocate his/her limited money income among available goods and services and as to maximize his or her satisfaction

THE CARDINAL THEORY (utility is measure in a CARDINAL sense)

CARDINAL UTILITY - assumes that we can assign values for utility ex. derive 100 utils from eating cake

BUDGET LINE

a LINE showing all COMBINATIONS of items can be purchased for a particular level of income *the slope DEPENDS on the PRICES of Goods X and Y *to use MORE goods, goods X and Y should be REDUCE, and VICE VERSA *When the quantity of good X is equals to Zero, all income is used to purchase good Y, and VICE VERSA

LAW OF DIMINISHING MARGINAL UTILITY

as more and more of a good are consumed, the process of consumption will yield smaller and smaller additions to utility *when TOTAL UTILITY is at MAXIMUM-----MARGINAL UTILITY is equals to 0 *when TOTAL UTILITY begins to DECREASE-----MARGINAL UTILITY is equals to NEGATIVE

THE ORDINAL UTILITY THEORY

can be measured in QUALITATIVE but only lists the MAIN OPTIONS *INDIFFERENCE CURVES *BUDGET LINE

Total Utility (TU)

the overall level of satisfaction derived from consuming a good or service