Microeconomics 3

1. Consumer preferences

2. Budget constraints

3. Consumer choices

List with specific quantities

of one or more goods.

1. Completeness: Preferences are assumed to be complete. In other words, consumers can compare and rank all possible baskets. Thus, for any two market baskets A and B, a consumer will prefer A to B, will prefer B to A, or will be indifferent between the two. By indifferent we mean that a person will be equally satisfied with either basket.

2. Transitivity: Preferences are transitive. Transitivity means that if a consumer prefers basket A to basket B and basket B to basket C, then the consumer also prefers A to C. Transitivity is normally regarded as necessary for consumer consistency.

3. More is better than less: Goods are assumed to be

desirable—i.e., to be good. Consequently, consumers always

prefer more of any good to less. In addition, consumers are

never satisfied or satiated; more is always better, even if just a

little better.

Curve representing all combinations of market baskets that provide a consumer with the same level of satisfaction.

Graph containing a set of indifference curves showing the market baskets among which a consumer is indifferent

Maximum amount of a good that a consumer is willing to give up in order to obtain one additional unit of another good. (slope of indifference curve)

Two goods for which the marginal rate

of substitution of one for the other is a constant.

Two goods for which the MRS is zero or infinite; the indifference curves are shaped as right angles.

Numerical score representing the satisfaction that a consumer gets from a given market basket.

Formula that assigns a level of utility to individual market baskets

All combinations of goods for which the total amount of money spent is equal to income.

P(food)*Q(food) + P(clothes)*Q(clothes) = I

1. It must be located on the budget line.

2. It must give the consumer the most preferred combination

of goods and services.

Benefit from the consumption of one additional unit of a good.

(satisfaction is maximized when equal to marginal cost)

Cost of one additional unit of a good.

Situation in which the marginal rate of substitution of one good for another in a chosen market basket is not equal to the slope of the budget line.

Additional satisfaction obtained from consuming one additional unit of a good.

Principle that as more of a good is consumed, the consumption of additional amounts will yield smaller additions to utility

Principle that utility is maximized when the consumer has equalized the marginal utility per dollar of expenditure across all goods.

Ratio of the present cost of a typical bundle of consumer goods and services compared with the cost during a base period.