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econ ch 10 outline

econ ch 10 outline - Kristin Chen Econ CH 10-The Rational...

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Kristin Chen Econ CH 10—The Rational Consumer 1. Utility & Consumption a. utility = a measure of the satisfaction the consumer derives from consumption of goods and services b. consumption bundle = the collection of all the goods and services consumed by that individual c. utility function = describes total utility generated by an individual’s consumption bundle d. util = unit of utility 2. Principle of Diminishing Marginal Utility a. Marginal utility = change in total utility generated by consuming one additional unit of that good or service b. marginal utility curve = shows how marginal utility depends on the quantity of a good or service consumed i. downward sloping c. principle of diminishing marginal utility = each successive unit of a good or service consumed adds less to total utility than the previous unit 3. Budgets & Optimal Consumption a. Budget constraint requires that the cost of a consumer’s consumption bundle be no more than the consumer’s total income b. Consumption possibilities = set of all consumption bundles that can be consumed given the consumer’s income & prevailing prices c. Budget line = shows the consumption bundles available to a consumer who spends all of his or her income i.
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