ECN 104 Chapter Notes - Chapter 7: Budget Constraint, Demand Curve, Opportunity Cost
Document Summary
Chapter 7 consumer choice and utility maximization. Utility is a want-satisfying power not the same as usefulness. Marginal utility: extra satisfaction from consuming one or more unit; change in total utility that results from the consumption of one more unit of a product (can be negative) Utils an imaginary unit of utility. Gains in satisfaction decline as additional units are consumed (this is the law of diminishing marginal utility) Demand curve has a downwards slope due to diminishing marginal utility: successive units of a good yield smaller and smaller amounts of marginal utility, consumer will only buy additional units if price of good falls. A typical consumer: exhibits rational behaviour, knows clear-cut preferences, is subject to a budget constraint, responds to price changes. Mu of product a = mu of product b. Assume consumer uses up entire income (no saving) Utility maximization at each step, spend where mu/$ is highest.