Fund of Manage & Economics Lecture Notes PDF

# FUND.OF MANAGE & ECONOMICS By DR. M.ABD ELNABY ## LEC:7 Chapter 4 Ch4: Choice and Utility Theory ## UTILITY It refers to how consumers rank different goods and services. ### TOTAL UTILITY (TU) Defined as the change in total utility divided by change in number units of good consumed ### MA...

# FUND.OF MANAGE & ECONOMICS By DR. M.ABD ELNABY ## LEC:7 Chapter 4 Ch4: Choice and Utility Theory ## UTILITY It refers to how consumers rank different goods and services. ### TOTAL UTILITY (TU) Defined as the change in total utility divided by change in number units of good consumed ### MARGINAL UTILITY It donates to the additional utility that you as consumer get from consumption of an additional unit of a commodity ### LAW OF MARGINAL UTILITY It states that as the amount of a good consumed increases, the marginal utility of that good tends to decline ## CONSUMER SURPLUS It is the gap between the total unity of a good and its total market value ## Budget line - It shows all different combinations of the two goods (X, Y) that consumer can obtain at the available income and prevailing prices in the market ## Indifference curve and its characteristics - It is the curve shows different combinations of two goods which give the same level of satisfaction - **Characteristics of indifference curve** - (1) Indifference curve downward from left to right - (2) Indifference curves are convex to the origin - (3) higher indifference curve means (represents) higher level of satisfaction - (4) Indifference curves can not intersect each other ## consumer equilibrium **(A) The main Assumptions** - (1) There are two goods (X), (Y) - (2) There is continuously in consuming certain units of goods - (3) Allocated income on spending is fixed - (4) Consumer rationality - (5) Prices are fixed - (6) More is preferred to less **(C) The Consumer Equilibrium** - Consumer equilibrium refers to obtaining maximum satisfaction from consuming a certain units of goods - From the figure we will find that the consumer equilibrium will occur at the tangency point of indifference curve (U2) with the budget line (AB) at point (Z) - Here the consumer will consume (Y1) units of good (Y) and (X1) from good (X) ## The equilibrium condition The image includes a graph describing the equilibrium condition. This graph shows 3 indifference curves labelled U1, U2, and U3. The graph also shows a budget line labelled "AB". The budget line intersects the indifference curve U2 at point Z, which also lies on a line labelled "MN". This represents the point of consumer equilibrium, where a consumer will consume (Y1) units of good (Y) and (X1) from good (X).