ECON 1100 1nd Edition Lecture 14Outline of Last Lecture I. ElasticityOutline of Current Lecture I.Budget LineII.Maximal UtilityCurrent LectureI. Budget LineDetermined by income & prices of goodsLine not a curve like supply & demandWhich is the best point on the graph? Point A = Income/P pizzaPoint B = Income/P sandwichSlope:-Psandwich/Ppizza Why?Income/Ppizza/Income/Psandwich -> -Psandwich/PpizzaCan’t add 3rd good to be able to draw in 2DWhen it’s more than 2 goods have to use equations -> higher level coursesII. Maximal UtilityAssumptions about consumer’s utility:More is better – total utility increases as consumption increasesThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Law of diminishing marginal utility – each individual unit adds less to utility than previous unitUtility = happiness or satisfactionComparing utility of pizza & sandwiches:Utility can’t be measured with unitsIt’s important that the consumer knows their preference Don’t ask for best choice, instead start somewhere and see if you can do better – marginal thinkingMake small changesNot spending less money over all, rather spending less on one item & more on otherMatters that you’re happier, not how much one is dropping that the other rising, change will eventually equalWhen equal, no unit gainAs you change the amount of 1, the utility ofeach changes@ point A, maximal utility for sandwiches @ point B & C, little less utility sandwiches, but greaterutility for pizzaPoint X represents possible equalizing pointUtility of pizza & sandwiches are the sameMaximal utility (MU) – extra utility you get from 1 more unitMeasure in $ worth not units Ex. Price pizza is $2, so $1 worth is ½ slice of pizzaPrice pizza is $4, so $1 worth is ¼ slice of pizza$1 worth anything = 1/P(units)MU/P = extra utility that you get from $1 worth when price = PIf X is ‘best’ combo then MU(p)/P(p) = MU(s)/P(s)Utility maximizing rule:Utility maximized (consumer happy as possible given tastes & budget) if MUx/Px=MUy/Py for every possible pair of goods X & YSuppose MUx/Px is greater than MUy/Py, then spend $1 less on Y, instead spend it on XKeep going till
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