ECO1014 Introductory economics

Consumer theory
Axioms:
Completeness rank bundles
Transitivity preferences logically consistent
Monotonicty more is better
Local nonsatiation weaker form of monotonicity
Convexity prefer variety
Sufficient to define utility function
Utility a cardinal measure if numbers are given to different levels of utility
and make absolute comparisons
Ordinal measure if only ranking matters, cannot make absolute
comparisons
Indifference curve combination of bundles that are eqully desirable/ give
same level of utility
U(x,y) = xy = C
Bundles further from the origin are preferred to those closer to the origin
Indifference curve through every possible bundle
Curves cannot cross
Slope downwards
Cannot be thick local nonsatiation / monotonicity
Marginal rate of substitution max amount of one good consumer will
sacrifice to obtain one more unit of another good and to maintain same
level of utility
MRS = change in x/change in y
Moving between bundles, MRS is negative to reflect a trade off, different
along the same curve
Slope of the indifference curve decreases/ becomes flatter diminishing
marginal rate of substitution

Budget constraint
Limited amount of income to spend
M = pxx + pyy
Assume consumer spends all income
Budget line line of graph implied by budget constraint
Y = M/py (px/py)x

slope = -px/py
opportunity cost of x in terms of y
if income rises, shifts to the right
when only px or py changes the graph rotates
consumer is rational in deciding how much to consume if he maximises
his utility
optimisation

if goods are perfect substitutes the indifference curve is a straight line,

MRS is constant. Consumers just purchase one good, for which he gets
more utility per unit of money spent (corner solution)
|MRS| = px/py
RHS = opp cost of x in terms of y
LHS = benefits of consuming x as opposed to consuming y

Perfect complements consumed together in fixed proportions

Indifference curves represented by l shape