Mıcroeconomıc Theory (ENG) — Ünite 2 Soru-Cevap

Utility: The level of satisfaction an individual receives from consuming goods and services.

The cardinal utility theory assumes that
the satisfaction level a consumer receives from
consuming goods and services is measurable just
like prices and quantities.

Marginal Utility is the extra satisfaction an individual receives from consuming one more unit of the good.

A consumption bundle represents a basket
of various combinations of goods and services
that the consumer wants to consume.

Indifference Curve is a curve representing all
combinations of commodity bundles that provide
the same level of satisfaction to a consumer.

Non-satiation states that
consumers do not have a satiation point and they
choose more of a good to less, which is also known
as “more is better”.

Axiom 2. Reflexivity: If two consumption
bundles are identical (each consumption bundle
contains the same amount of the same good) then
the consumer is indifferent between the two bundles.

Axiom 2. Reflexivity: If two consumption
bundles are identical (each consumption bundle
contains the same amount of the same good) then
the consumer is indifferent between the two bundles.

Diminishing marginal rate of substitution
means that the slope of the indifference curve
decreases as the consumer substitutes more of
commodity X to commodity Y.

Based on the axioms and assumptions of the
consumer preference theory, our textbook lists 5 important properties regarding indifference curves.

Indifference curves are everywhere thin and they cannot be thick means that one and only one indifference curve passes through each bundle on the commodity space

Indifference curves are convex to the
origin: This property is a direct consequence of
the assumption of diminishing marginal rates of
substitution. Consider the indifference curve at
Figure 2.6. A movement along the indifference
curve means the consumption pattern of
the consumer changes while the original
satisfaction level of the consumer is constant.
Indifference curves are downward sloped so a
movement along the curve means the consumer
is substituting one good to the other. In the
movement from bundle A to bundle B the
consumer is willing to give up 6 units of good Y
in order to get one more unit of good X. In the
move from B to C the consumer is willing to
give up 4 units of good Y and in the move from
C to D he/she is willing to give up only 2 units
in order to get one more unit of commodity X.
So, convexity of the indifference curve implies
that the consumer has a decreasing willingness
to substitute one good to the other as he/she has
more of one good and less of the other. This
would be the first economic interpretation of
diminishing marginal rates of substitution.

1. Indifference curves are everywhere thin and they cannot be thick.

2. Indifference curves have a negative slope.

3. Indifference curves farther away from the origin represent higher satisfaction levels for the consumer.

4. Indifference curves never intersect each other.

5. Indifference curves are convex to the origin.

Marginal Rate of Substitution (MRS) is the maximum amount of a good that a consumer
is willing to give up in order to obtain one more unit of another good while the satisfaction
level of the consumer is constant.

If the marginal rate of substitution between
two goods is constant, they are called perfect
substitutes. 

Two functions with identical ordinal
properties are called positive monotonic
transformations of each other.

If the marginal rate of substitution between
two goods is infinite, they are called perfect
complements. Indifference curves are L-shaped.

A very common utility function that satisfies all the axioms and assumptions of the consumer preferences
is known as the Cobb-Douglas Utility function.

Once we obtain the consumer’s
equilibrium, we can now analyse
the effects of a price change on the
equilibrium of the consumer.

A choice made by a consumer that can be
characterized as by tangency of two curves
on a graph is called interior solution.