ECN 200: Introduction to Economics
Nusrat Jahan
Lecture-4
Utility
Total Utility:
The total benefit that a person gets from the consumption of all the different goods and
services is called total utility.
Marginal Utility:
The change in total utility that results from a one-unit increase in the quantity of a good
consumed.
Positive Marginal Utility:
All the things that people enjoy and want more of have a positive marginal utility. Total
utility increases as the quantity consumed increases.
Diminishing Marginal Utility:
The Marginal utility declines as the consumer consumes more of a good.
Indifference Curve
An indifference curve is a line that shows combinations of goods among which a
consumer is indifferent. It is a line showing combination of goods that gives the
consumer same level of utility.
Indifference map: A family of indifference curves showing different levels of
satisfaction constructs an indifference map
Budget Line
Budget line describes the limits to a household’s consumption choices. It is the
combination of maximum possible goods consumed given a household’s income and
prices.
Budget line can be described by using budget equation. A budget equation starts with
the fact that,
𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 = 𝐼𝑛𝑐𝑜𝑚𝑒
Expenditure is equal to the sum of the price of each good multiplied by the quantity
bought. If there are two goods 𝑥1 and 𝑥2 and their prices are 𝑝1 and 𝑝2 respectively
then
𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 = 𝑝1 𝑥1 + 𝑝2 𝑥2
If income is denoted by Y then the budget equation can be expressed as
𝑝1 𝑥1 + 𝑝2 𝑥2 = 𝑌
Budget line rotates when there is a change in prices
Budget line shifts when there is a change in income
Equilibrium
The equilibrium occurs at the tangency between the indifference curve and the
budget line.