Chapter 2 Utility And Choice

Front 1

theory of choice

Back 1

the interaction of preferences and constraints that cause people to make the choices they do

Front 2

utility

Back 2

the pleasure that people get from their economic activity

Front 3

ceteris paribus assumption

Back 3

in economic analysis, holding other factors constant so that only the factor being studied is allowed to change

Front 4

three assumptions of preferences

Back 4

completeness
transitivity
more is better

Front 5

completeness

Back 5

assumption that someone is able to state which of any two options is preferred

Front 6

transitivity

Back 6

if a is preferred to b, and b is preferred to c, then a is preferred to c

Front 7

more is better

Back 7

more of a good is preferred to less

figure 2.1

Front 8

indifference curve

Back 8

curve that shows all the combinations of goods or services that provide the same level of utility

person is indifferent to which combination

Front 9

Marginal rate of substitution

Back 9

the rate at which someone is willing to reduce consumption of one good when they get one more unit of another good.

negative slope of the indifference curve

mrs = 2 = individual is willing to give up two of good Y for one more of good X

More x less y

Front 10

diminishing MRS

Back 10

convex shape.

any consumption bundle that represents that avg between two equally attractive extremes will be preferred to those extremes.

people prefer variety in consumption choices

Front 11

indifference curve maps

Back 11

a contour map that shows the utility an individual obtains form all possible consumption options

every point must have only one indifference curve passing through it

Front 12

vertical indifference curve

Back 12

sign of useless good

Front 13

increasing linear indifference curve

Back 13

economic bad

houseflies

Front 14

strainght line, decreasing indifference curve

Back 14

perfect substitutes

MRS=1 along any indifference curve

Front 15

L shaped

Back 15

perfect complements

left shoe right shoe

Front 16

Utility Maximization

Back 16

1) spend entire income amount
2) MRS should equal ratio of those goods market prices

Front 17

budget constraint

Back 17

limit that ones income places on the combinations of good that an individual can buy

y intercepts is I/Py

Front 18

Xmax/Ymax

Back 18

number of units purchased if all income spent on X. same for y

y expensive, x cheap = flatter

Front 19

Slope of budget constraint

Back 19

-Px/Py

shows opportunity cost of of buying one more unit of x

if Px=4 amd Py=1 then slope = -4. therefore for every additional unit of x requires that y purchases are reduced by 4

Front 20

problems with perfect substitutes

Back 20

spend all income on good that is least expensive given the utility provided

when perfect substitues but not identical (different utility), then need to incorporate most bang for your buck

Front 21

problems: perfect complements

Back 21

2 bags of candy for each movie

C=2M

Front 22

problems: middle ground

Back 22

MRS = y/x

MRS = Px/Py = 2

y/x=2 y=2x

substitute

Front 23

composite good

Back 23

combining expenditures on severl different goods whose relative prices do not change into a single good for convenience of analysis