AGEC 105 Lecture Notes - Lecture 3: Budget Constraint, Consistency, Marginal Utility

• School: Texas A&M University
• Department: Agricultural Economics
• Course: AGEC 105
• Professor: Ariun Ishdorj

Document Summary

Topics of discussion: the budget constraint, utility theory (chapter 3 part 1, total utility, marginal utility, law of diminishing marginal utility, indifference curve (chapter 3 part 2, concept of isoutility, marginal rate of substitution. At the highest level of generality, we are all very much alike: come up against the same constraint. Too little time to enjoy it all. The theory of individual decision maki(cid:374)g is (cid:272)alled (cid:862)(cid:272)o(cid:374)su(cid:373)er theory(cid:863) Virtually all individuals must face two facts of economic life: have to pay prices for the goods and services they buy, have limited funds to spend. A (cid:272)o(cid:374)su(cid:373)er"s (cid:271)udget (cid:272)o(cid:374)strai(cid:374)t ide(cid:374)tifies (cid:449)hi(cid:272)h combinations of goods and services the consumer can afford with a limited budget. Budget line is the graphical representation of a budget constraint: the price of one good relative to the price of another, the slope of the budget line indicates the spending trade-off between one good and another.