DES

Microeconomic
s
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Margin
 • One more / one less; depending on how

Margin much of the commodity an individual has

they will add one more/ one less to their

existing stock
Utility
 Utility

The amount of satisfaction derived from a commodity / service

at a particular point in time
Marginal Utility
 Marginal Utility

The amount of satisfaction obtained in possessing one more

 • Marginal utility usually diminishes as

Law of consumption increases hence an

diminishing individual’s demand curve slopes

utility downwards; marginal utility declines as

supply increases
 Indifference curve
• It is a graph that represents 2 goods that the consumer has equal satisfaction/utility. No matter
the combination, the consumer is equally satisfied. If the consumer decides he wants 10
apples and 5 pears, he feels indifferent;
he is equally satisfied even though he
has less pears and vise versa.
I2
Apples If the consumer though has an increase
I1
10 in income, this can increase his
satisfaction hence a new indifference
curve will form parallel to the old one
9 resulting in the consumer having more
of goods with the same satisfaction no
matter the combination. The further
8 away the curve is from the origin the
more satisfied is the consumer.

Pears
0 5 15 20
 Indifference Map
• It is a family of indifference curves; more than one indifference curve
Characteristics:
1. Many indifference curves drawn
within one axis
2. Each indifference curve on the map
I2 shows different combinations of
Apples goods, each combination giving an
I1 equal level of total utility
10
3. Each indifference curve is convex to
the origin because of the MRS
9 4. An indifference curve to the right of
another indicates a higher level of
utility
8 5. They are drawn parallel to each
other; they cannot intersect

Pears
0 5 15 20
 Marginal Rate of Substitution
• It is the actual slope of the indifference curve. It is the rate at which the consumer is willing to
give up more of one good for another; while maintain the same level of utility. The more
concave the shape of the curve means that MRS is increasing so the consumer substitutes more
of good x for good y.
Apples I1
10

Pears
0 5 15 20
 Budget Line

“A budget line shows the combinations of two products that a consumer can afford to
buy with a given income – using all of their available budget” (Riley, n.d)

Budget (AB) = $60 • At point (A) means you will use your entire
Apples budget to purchase only apples and no
A pears.
10 • At point (B) consumer makes a choice to
purchase
• Anu point along the budget line represents
9
any combination of the two goods bought
but it cannot exceed the budget ($60)
8

B
Pears
0 5 15 20
 Shifts in the Budget Line

“A budget line shows the combinations of two products that a consumer can afford to
buy with a given income – using all of their available budget” (Riley, n.d)
• The existing budget was $60.The consumer has
C
15 an increase in income, this leads to shift and
formation of a new budget line (CD= $80) as
Apples
A the consumer can purchase more, hence
10 buying more apples and pears with his new
budget.
F • The consumer’s existing budget is $60.
9
Unfortunately, his income decreased to $50
hence it causes an inward shift and formation
8 of a new budget line (EF =$50), as the
consumer purchases less of the two goods so
he can stay within his new budget.
E B D
Pears
0 5 15 20 30
 Budget Line

Price also affects the slope of the budget line.

• If the price for pears drops, the shape of the

Apples existing budget line alters as the consumer
A will purchase more pears, gaining more
10 pears within the same budget.

B
Pears
0 5 15 20 25
 References
Riley, G. (n.d). The budget line. Tutor2U.
https://www.tutor2u.net/economics/reference/the-budget-line