LECTURE NOTES

Tasneema Afrin
Assistant Professor
IBA,DU
CONSUMER PREFERENCES
AND CHOICE
Salvatore#3
Utility
■ Utility means satisfaction received
from consuming a good or service
■ Total utility mean s
the complete amount of satisfaction
gained
■ Marginal utility refers to the
satisfaction gained from an extra unit
consumed
■ Cardinal utility is the utility wherein the
satisfaction derived by the consumers
from the consumption of good or
service can be measured numerically
■ Ordinal utility states that th e
satisfaction which a consumer derives
from the consumption of product or
service cannot be measured
numerically
Indifference Curve

An indifference curve is a
graph showing combination
of two goods that give the
consumer equal satisfaction
and utility
Characteristics of Indifference Curves

■ Indifference curve slope

downwards
■ Indifference curves can
never intersect each
other
■ Indifference curves are
always convex to the
origin
Marginal Rate of Substitution

■ The marginal rate of

substitution (MRS) is the amount of
a good that a consumer is willing to
consume in relation to another
good, as long as the comparable
good is equally satisfying
■ (ΔX)(MUX)=- (ΔY)(MUy)
MUx/MUy=-ΔY/ΔX=MRS xy
Special Types of Indifference Curves
Budget Line

■ Budget line is a graphical

representation of all possible
combinations of two goods which
can be purchased with given
income and prices

■ PxQx+PyQy=I

PyQy=I- PxQx

Qy=I/Py-(Px/ Py) Qx
Changes in Income and Prices and Budget Line

Change in Income Change in Price

Utility Maximization

■ Consumers decide to allocate

their money incomes in such
a way that the last amount
spent on each product
purchased yields the same
amount of extra
marginal utility

■ MRSxy = MUx/MUy=Px /Py

Corner Solutions