ECON20002 Lecture Notes - Lecture 5: Marginal Utility, Indifference Curve, Marginal Cost
27 Jul 2018
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Don"t actually expect consumers to have perfect substitutes or perfect complements: Perfect substitutes approximates behaviour for high substitutability goods. Perfect complements approximates behaviour for low substitutability goods. Combination of goods x and y in the standard case is optimal (maximises utility) if it satisfies two properties: Note: need these two equations to solve for x* and y* Value of the slope of the indifference curve. Magnitude of the slope of the budget constraint. How much the market requires consumers give up in y to get more x. Two conditions must be satisfied when a consumer"s made an optimal choice, given they have standard preferences. Indifference curve is tangent to the budget constraint. Consumers at the highest possible utility, given their financial constraints. Combination of x and y needs to be on the budget line. Total expenditures of x and y must exactly equal total income (i) Rearrange in terms of one variable (y) equation (1)
