2) We face constraints: Limited INCOME matched with varying PRICES necessitates choice.
3) One good can be SUBSTITUTED for another.
4) Consumers must make DECISIONS without perfect information.
5) The law of diminishing marginal utility/benefit applies.
-Utility: measure of SATISFACTION we get from doing something
-Units of utility: measured in UTILS
Important to note about utility
-Utility is subjective:
-cannot compare the utility of two people
-use to see how one person RANKS their consumption choices.
The total satisfaction we get from the total amount of something we consume
The additional utility we get from consuming on more units of something.
-Change in total utility/change in consumption
The law of diminishing marginal utility (or diminishing marginal benefit)
As X increase, MUx decreases.
fun facts about the relationship between TU and MU
MU is the slope? decreasing slop of MU....TU increase at a decreasing rate.
Utility Maximization and Consumption Choices
our goal as consumers: MAXIMIZE UTILITY, based on our preferences.
But subject to 2 constraints:
a) our income
b) prices of goods
do utility examples.
The utility maximizing condition
-MUx/Px=MUy/Py (consumer equilibrium)
--the marginal utilities per dollar are equal.
-If MUx/Px>MUy/Py...it is rational to consume more of good x
-As x rises, MUx falls making the two sides equal if MUx/Px<MUy/Py...it is rational to consume more of good y.
Marginal utility to price ratios
Tell you what to get. DO examples from ppt.
Utility Theory and the downward sloping demand curve
Because a consumer's willingness to pay for a unit of a good is directly related to the utility derived from consuming the unit, the law of diminishing utility implies that a consumer's marginal benefit, and thus the height of the demand curve, falls with the rate of consumption
-Spend the least amount of money-same happy.
-COMBINATIONS OF CONSUMPTION...same utility...trying to spend the least amount of money.
-LOOK AT THE DIFFERENT TYPES!
-there are budget constraints
-Subst...doesn't matter what you get...
-Look at compliments curve (getting both affects happiness)
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