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Learning Objectives

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Learning Objectives

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Now · 1. Utility Theory & Consumer Choice

Learning Objectives

Apply utility theory to explain consumer choice
Use indifference curves and budget constraints
Derive individual and market demand
Week 1: Demand, supply, equilibrium
Basic marginal analysis

1. Utility Theory & Consumer Choice

Intuition: Consumers allocate limited income to maximize satisfaction. Each additional unit provides less extra satisfaction (diminishing marginal utility). Consumer Equilibrium:

\frac{MU_x}{P_x} = \frac{MU_y}{P_y}

Worked Example: Sam has

20, pizza

5/slice, soda

2/can. Optimal: 2 slices (MU/P=8) + 3 cans (MU/P=8). Cost =

16.

2. Indifference Curves & Budget Constraints

Indifference Curve: All combinations giving equal satisfaction. Properties: Downward sloping, convex to origin, higher = better, never cross. Budget Line: PxX + PyY = I, Slope = -Px/Py Equilibrium: Tangency where MRSxy = Px/Py.

3. From Individual to Market Demand

Market demand = horizontal sum of individual demands.

Q_{market}(P) = \sum_{i=1}^n Q_i(P)

Concept	Formula	Notes
Budget Line	PxX + PyY = I	Slope = -Px/Py
Consumer Equilibrium	MUx/Px = MUy/Py	Equal marginal utility per rupee
MRS	MRSxy = MUx/MUy	Slope of indifference curve

Q1: MUx=20, MUy=10, Px=5, Py=2. Maximizing utility?

MUx/Px=4, MUy/Py=5. Not equal - consume less X, more Y. Q2: Income=100, Px=10, Py=5. Budget line?

10X+5Y=100, or Y=20-2X. Slope=-2. Q3: What does convex indifference curve imply?

Diminishing MRS - as X increases, willingness to trade Y for X decreases. Join Discord PreviousFoundations & Demand/SupplyNextProduction & Cost Analysis