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