University of Oregon Marketing 311

Marginal benefit
the increase in the value of benefit b(x) injured due to one more unit of x
marginal cost
the increase in the cost c(x) due to one more unit of x
positive analysis
Analysis describing relationships of cause and effect (IT IS TESTABLE)
normative analysis
analysis examining questions of what ought to be; opinions
Law of Demand
-Demand curve is downward sloping: quantity goes down when price goes up
demand functions
Q=f(pi,ps,pc,i,n,t,PiE)
-q : quantity demand for good
-f: denotes a function
-Pi: price of good
-Ps: price of substitutes
-Pc: price of complements
-I: Income
-N: number of consumers
-T: taxes on product
-PE: expectations of future price changes
-Tastes also shape the function
Supply Curve
a line that describes the quantity of a product supplied by producers for each possible price of the product

supply curve slopes up
-each producer wants to sell more
-new suppliers enter the market

Supply function
QiS=f(PI,Pinputs,TECH,Ns,T,r,PiE)
-Qs: quantity supplied
-Pi: price of good
-Pinputs: is the price of inputs
-TECH: technology (affects production costs) available to firms
-Ns: number of firms in market
-T: taxes
-r: interest rates
-PE: expected future price of product
Consumer surplus
area below the demand curve and above the price

it is the difference between what the consumer is willing to pay for a product, and the price of the product

producer surplus
area below the price and above the supply curve

the difference between the price of a product (revenue) and the cost of producing the product

Tax (sales tax)
– a price surcharge on a product which flows to the government
-Pt=Ps+T

-Pt is price paid by consumers
-Ps is price given to suppliers (before tax)
-T is the tax

Properties of Indifference curves
1. There are infinitely many ICs
2. ICs don’t cross
3. ICs are concave
4. ICs are downward sloping

violations
-“bad” goods
-perfect substitutes
-perfect complements
-this will give you different IC shapes

Marginal rate of substitution (MRS)
-The maximum amount of one good (good 2) a person is willing to give up in order to gain one unit of the other good (good 1)

-amount of a good one person must receive in order to feel indifferent from the loss of one unit of the other good

-the rate at which a consumer is willing to trade one good for another

Utility Function
-representation of preferences

-a function u=u(x1,x2) is a function which assigns, for each possible bundle (x1,x2), a value/number u representing the level of satisfaction of the consumer

-The unit of measure of satisfaction

Properties of utility
-always defined
-monotonicity … u(x1,x2) must be increasing in both x1 and x2 (because more is better)
-transitive
-convex… if the consumer is indifferent between A and B, any combination of C gives a strictly higher utility than A or B
-Continuous.. the utility function does not “jump”
Marginal utility (MU)
-rate at which utility changes when we change one of the goods
-Ceteris paribus “holding all other factors constant”
diminishing marginal utility
-utility increases by less and less as you add a good

-marginal utility falls with quantity of the good

Ordinal property of utility
utility functions can rank bundles by order of preference
cardinal property of utility
utility functions describe utils, so you can compare different levels of happiness
Budget set
The set of all possible bundles (x1,x2) which a consumer can purchase given prices and their income
affordable bundle
a bundle that is in the budget set
budget line
the set of bundles that use up the consumer’s entire income
budget constraint
another word for “budget line”
BUDGET LINE EQUATION
P1X1+P2X2=I
Price consumption curve
the set of bundles chosen by a consumer as price of one good varies, ceteris paribus
demand curve
the relationship between price and quantity purchased of good, ceteris paribus
income consumption curve
the set of bundles chosen by a consumer as income varies, ceteris paribus
engel curve
the relationship between income and quantity purchased of a good, holding other prices constant
normal goods
goods for which consumption increases as income increases
inferior goods
goods for which consumption decreases as income increases
Compensated budget line
following a price change, the compensated budget line is a line that is:
1. tangent to the OLD IC
2. Parallel to the NEW budget line
Elastic demand
demand is elastic if it is <-1 if price increases by 1%, demand declines by more than 1%
inelastic demand
demand is inelastic if it is between -1 and 0

if price increases by 1%, demand declines by less than 1%

unit elastic
demand is unit elastic if it is =-1
isoelastic demand
same as unit elastic