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EC4004Lecture 2
Utility & Choice
Yesterday
Introduction to the Course
Today
Utility & Choice
We can represent individual choices amongst competing alternatives using indifference curves & budget constraints
Volunteers
Frank Mackey
Emmett McDonagh
Utility
Utility is the satisfaction a person receives from their economic activities.
Assumptions
• Ceteris Paribus (holding things constant)
• Utility Function
FunctionSet A
Set B
Assumptions about
Preferences
Transitivity
Completeness
More Preferred to Less
Diminishing Marginal Utility: Demo
Indifference Curves
The indifference curve represents a set of points where, for each consumer, each point represents a
combination of goods which makes them equally happy.
Choosing Between Alternatives
Marginal Rate of Substitution, MRS
Slope of the Indifference Curve
Ratio of marginal utilities of the two goods.
Budget Constraint
The budget constraint shows the combinations of the two goods the consumer can afford, given that
they have a fixed amount of income
Mathematica
Summary
We can represent individual choices amongst competing alternatives using indifference curves & budget constraints
Exercises to Try
• Ex. 2.1, 2.2, 2.9
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EC4004Lecture 2
Utility & Choice
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