Midterms: Theory of Production

• it denotes satisfaction

  utility
• factors that make an individual decide what bundle of goods to consume.

  taste and preferences
• 2 attempts to quantify satisfaction

  1. cardinal utility theory
  2. ordinal utility theory
• This theory used ranking of preferences, which attaches specific numbers to different levels of satisfaction.

  cardinal utility theory
• this thoery used, only consumers can do is to rank or order their preferences,

  ordinal
• This law states that as an individual consumes more units of commodity per unit of time, his/her total utility increases, reaches its maximum, and starts to decrease

  law of diminishing marginal utility
• it is obtained by subtracting successive units of total utility divided by the successive units of quantity

  marginal utility
• 3 Assumption of Rational Preferences

  1. completeness
  2. non-satiation
  3. transitivity
• a property of preference that implies a bundle of goods can be ranked as preferred, indifferent, or less preferred to one another

  completeness
• known as the “more is better” property of preferences

  non-satiation
• if bundle A is preferred over bundle B, and bundle B is preferred over bundle C, then bundle A is preferred over bundle C

  transitivity
• means that you will choose one bundle over the other.

  preferred
• means that you will gain the same satisfaction with two bundles, other factors being equal.

  indifferent
• 3 characteristics of the indifference curve

  1. negatively sloped
  2. convex to the origin
  3. do not intersect
• shows the different combinations of Good X and Good Y that a consumer can purchase given his income and the prices of the goods.

  budget line