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˜ Utility Theory
˜ Indifference Curves
˜ Budget Constraints
˜ Individual Demand
˜ Demand Curves and Consumer Surplus
˜ Consumer Choice
˜ Optimal Consumption
 
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˜ utility ˜ budget constraint
˜ nonsatiation principle ˜ income effect
˜ indifference ˜ substitution effect
˜ ordinal utility ˜ price-consumption curve
˜ cardinal utility ˜ income-consumption curve
˜ utility function ˜ Engle curve
˜ utils ˜ normal goods
˜ market baskets ˜ inferior goods
˜ marginal utility ˜ consumer surplus
˜ law of diminishing marginal utility ˜ two-part pricing
˜ indifference curves ˜ bundle pricing
˜ substitutes ˜ optimal market basket
˜ complements ˜ revealed preference
˜ perfect substitutes ˜ marginal rate of substitution
˜ perfect complements ˜ consumption path
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˜ assumptions about Consumer Preferences
˜ More is better.
˜ Consumers can rank preferences.
˜ Consumers ran-order desirability of products.
˜ Utility Functions
˜ Descriptive statement relates well-being and consumption.
˜ Marginal Utility
˜ added benefit is focus of consumers.
˜ Law of Diminishing Marginal Utility
˜ Marginal utility eventually declines for everything.
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˜ Basic Characteristics of Indifference Curves
˜ Higher indifference curves are better.
˜ Indifference curves do not intersect.

˜ Indifference curves slope downward.

˜ Indifference curves are concave to origin.

˜ Perfect Substitutes and Perfect Complements

˜ Perfect substitutes satisfy the same need.
˜ Perfect complements are consumed together.
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˜ Basic Characteristics of Budget Constraints
˜ Shows affordable combinations of X and Y.
˜ Slope of ²PX/PY reflects relative prices.

˜ Effects of Changing Income and Changing

Prices
˜ Budget increase causes parallel outward shift.
˜ Budget decrease causes parallel inward shift.

˜ Income and Substitution Effects

˜ Income (substitution) effect is change in overall
(relative) consumption.
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˜ Price-consumption Curve
˜ Shows how consumption is affected by price changes
(movement along demand curve).
˜ Income-consumption Curve
˜ Shows how consumption is affected by income changes
(shifts from one demand curve to another).
˜ Engle Curves
˜ Plot between income and quantity consumed.
˜ Consumption of normal goods rises with income.
˜ Consumption of inferior goods falls with income (rare).
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˜ raphing the Demand Curve
˜ Demand curves always slope downward.
˜ Consumer Surplus
˜ Value received above amount paid.
˜ Consumer Surplus and Two-Part Pricing: an
Illustration
˜ Membership fees and user fees extract consumer surplus for
the seller.
˜ Consumer Surplus and Bundle Pricing
˜ Bundle pricing extracts consumer surplus for sellers.
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˜ Marginal Utility and Consumer Choice
˜ Optimal consumption maximizes utility.
˜ Optimal consumption reflects marginal utility
(benefits) and marginal costs.
˜ Revealed Preference
˜ Documented desire.
˜ Buyer decisions can be used to infer consumer
preferences.

   
˜ Marginal Rate of Substitution (MRS)
˜ MRSXY = -MUX/MUY and equals indifference curve
slope.
˜ MRSXY shows tradeoff in the amount of X and Y
consumed, holding utility constant.
˜ MRSXY diminishes as amount of substitution of X
for Y increases.
˜ Utility Maximization
˜ Optimality requires PX/PY = MUX/MUY.
˜ Optimality requires MUX/PX = MUY/PY.