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    Economics Reviewer 2024 - Pages-5

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    Mary Aileen del Fonso
    Economics

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    Economics Reviewer 2024 - Pages-5

    Uploaded by

    Mary Aileen del Fonso
    5 views2 pages
    Economics

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    Economics Reviewer 2024_pages-5

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    © © All Rights Reserved

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    Economics

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    5 views2 pages

    Economics Reviewer 2024 - Pages-5

    Uploaded by

    Mary Aileen del Fonso
    Economics

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    A.

    Utility

    Utility • The level of satisfaction or happiness that a person receives from a bundle of
    goods and services
    • Utility can be measured in hypothetical units called utils.

    Total Utility • The total amount of utility that a consumer gets from the consumption of
    goods and services

    Marginal Utility • The additional satisfaction gained from the consumption of an additional unit
    of good or service

    Law of diminishing • States that the more of any good consumed in a given period, the less
    marginal utility satisfaction (utility) generated by consuming each additional (marginal) unit of
    the same good.
    • The more of a good or service you consume, the closer you are to being
    satiated – reaching a point at which an additional unit of the good adds
    nothing to your satisfaction

    Increasing marginal • States that consuming an additional amount of any good or service will result
    utility in a higher satisfaction level (higher utility)

    Constant marginal • States that consuming additional amount of any good or service will not
    utility change the satisfaction level of the consumer

    B. Budget Constraint

    In the discussion of budget constraints, it is assumed that a consumer has limited income and
    consumes only two goods. This is done to have a better understanding of how income and prices affect
    consumer’s demand for goods. But in reality, households consume hundreds and thousands of goods
    and services.

    Budget constraint • Refers to the limit imposed on household choices by income, wealth, and
    product prices. Within the limits, households are free to choose, and their
    ultimate choice depends on their likes and dislikes

    Bundle of goods • A combination of quantities of two or more goods

    Budget set • The bundle of goods along and within a budget line

    • A price change will cause a tilt in the budget line.


    o An increase in the price of Good X and no change in the price of Good Y (Figure 7a) shows an
    inward tilt of the budget line (from 100 to 80 units of Good X).
    o A decrease in the price of Good X and no change in the price of Good Y (Figure 7b) shows an
    outward tilt of the budget line (from 100 to 200 units of Good X)

    Figure 7a Figure 7b
    Page 8 of 28
    • A change in income will cause the budget line to shift.
    o An increase in income shifts the budget line outward (Figure 8a)
    o A fall in income shifts the budget line inward (Figure 8b)

    Figure 8a Figure 8b

    C. Preferences

    Consumers’ preferences are presented by indifference curves.

    Indifference curve • A set of points, each representing a combination of some amount of Good X
    and some amount of Good Y, that yield the same amount of total utility.
    • If the two bundles suit the consumer’s tastes equally well, he is indifferent
    between the two bundles.
    • Properties of indifference curves:
    (1) Higher indifference curves are preferred to lower ones
    (2) Indifference curves are downward-sloping
    (3) Indifference curves do not cross
    (4) Indifference curves are bowed inward
    • The family of all indifference curves of a consumer is called an indifference
    map

    Figure 9. Indifference curve

    Page 9 of 28

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