AEM-ECON2300-Lecture%204%20-%20Spring%202011 - Lecture 4...

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1 of Lecture 4 BASIC DEFINITIONS (2 - cont’d): DEMAND SIDE Indifference Curve (IC) : curve showing all possible points of consumption of two goods which yield an equal level of utility or satisfaction. Marginal Rate of Substitution (MRS) : the amount of one product that a consumer (or nation) must sacrifice in order to consume one additional unit of a second product and leave total utility unchanged (also the slope of the indifference curve at the point of consumption) Diminishing Marginal Utility: the substitution of one good for another in demand becomes progressively more expensive; that is, one must sacrifice less and less of one good to consume more and more of a second good (e.g., indifference curves are convex to the origin, with a declining slope as a consumer (nation) moves down the curve). Prof. David Lee AEM/ ECON 2300
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2 of Lecture 4 Prof. David Lee AEM/ ECON 2300 Indifference curves X 1 X 2 B A C PPF Points of same total utility to consumers • Consumer is indifferent between consumption bundles A, B, and C Marginal rate of substitution = slope of indifference curve IC
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This note was uploaded on 03/27/2011 for the course AEM 2300 taught by Professor Lee,d.r. during the Spring '06 term at Cornell University (Engineering School).

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AEM-ECON2300-Lecture%204%20-%20Spring%202011 - Lecture 4...

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