# Economics: 3/7, 3/9 notes

## 21 terms

### Opportunity Cost

WHAT of Good X= Px/Py (also known as relative price- the price of one good relative to another)

### price

When WHAT changes, opportunity cost changes

### total utility

(TU) Total satisfaction from total amount you consume

### Marginal Utility

(MU) Change in Total Utility from consuming an additional unit

### Law of Diminishing Marginal Utility

As consumption of a g/s increases, Marginal Utility decreases

### negative

Rational consumer will not consume to the point where marginal utility is WHAT?

### MUx/Px

Max Utility subject to income and prices. Use MU per dollar to determine utility max bundle of g/s. WHAT EQUATION?- gain in utility for each \$ we spend. Decreases as consumption increases.

### consumer equilibrium

MUx/Px=MUy/Py is WHAT? An affordable combination that gives us the highest possible level of utility.

### greater than

If MUx/Px WHAT MUy/Py- consumer more X. As you consume more X, MUx will fall and MUy will rise. You continue until the two are equal (consumer equilibrium)

### less than

If MUx/Px WHAT MUy/Py- consume more Y. As you consume more Y, MUy will fall and MUx will rise. Continue until the two are equal (consumer equilibrium)

### higher

Ex.) MUx/Px= 5 and MUy/Py= 3. Consume more X. Which # is WHAT, that is what you need to consume more of.

### substitution effect

Impact on quantity demand due to change in relative price. Will always obey the law of demand. (Increase in P-> Decrease in quantity demanded)

### income effect

Impact on quantity demanded due to a change in REAL INCOME (purchasing power). Px decreases-> real income increases

### rises

If P of a normal good falls, quantity demanded will rise. Real income WHAT?

### falls

If P of an inferior good falls, quantity demanded will fall. Real income WHAT?

### model of consumer choice won't work

model of consumer choice won't work: 1. Uncertainty 2. Imperfect Info 3. Spending does not equal income 4. Utility depends on others 5. Irrational decisions

### height of demand curve

WHAT: how much a consumer is willing to pay/how much someone values each lesson

### consumer surplus

Difference between what you are willing to pay and what you actually pay for g/s. Everyone pays P* (market price)

### consumer surplus

Calculate WHAT? 1/2bh ?

### fall

Consumer surplus will WHAT if price rises?

### rise

Anytime Price decreases, consumer surplus will WHAT?