Principles of Economics Session 3
Principles of Economics Session 3
Topics To Be Discussed Consumer Preferences ◆ Budget constraints ◆ Consumer choice ◆ Marginal utilit Substitution and income effect
Topics To Be Discussed Consumer Preferences Budget Constraints Consumer Choice Marginal Utility Substitution and Income Effect
Topics to be Discussed ◆ Market demand ◆ Consumer Surplus ◆ Recognizing lock-n
Topics to be Discussed Market Demand Consumer Surplus Recognizing Lock-In
Steps of Studying Consumer Behavior Study consumer preferences o How and why do people prefer one good to another? Study budget constraint How are consumers constrained by their limited incomes? Combine consumer preferences and budget constraints to determine consumer choices o What combination of goods will consumers buy to maximize their satisfaction?
Steps of Studying Consumer Behavior Study consumer preferences How and why do people prefer one good to another? Study budget constraint How are consumers constrained by their limited incomes? Combine consumer preferences and budget constraints to determine consumer choices What combination of goods will consumers buy to maximize their satisfaction?
Market Basket Amarket basket is a collection of one or more commodities Y One market basket may be preferred over another market basket containing a different combination of goods
Market Basket A market basket is a collection of one or more commodities. One market basket may be preferred over another market basket containing a different combination of goods
Three Basic Assumptions o Preferences are complete. Preferences are transitive Consumers always prefer more of any good to less
Three Basic Assumptions Preferences are complete. Preferences are transitive. Consumers always prefer more of any good to less
Consumer Preferences Market Units of Units of Basket Food Clothing 20 30 B 10 50 40 20 E 30 10 20 10
Consumer Preferences Market Basket Units of Food Units of Clothing A 20 30 B 10 50 D 40 20 E 30 40 G 10 20 H 10 40
Indifference Curves Indifference curves represent all combinations of market baskets that provide the same level of satisfaction to a person
Indifference Curves Indifference curves represent all combinations of market baskets that provide the same level of satisfaction to a person
Consumer Preferences Combination ba, & D Clothing (units per week ields the same satisfaction 50 B E is preferred to U1 H U, is preferred to H& G 40 E A 30 20 G Indifference curve 10 Food 10 20 30 (units per week
▪ Combination B,A, & D yields the same satisfaction ▪E is preferred to U1 ▪ U1 is preferred to H & G Indifference Curve Consumer Preferences Food (units per week) 10 20 30 40 10 20 30 40 Clothing (units per week) 50 G D A E H B
Consumer Preferences Clothing The consumer prefers (units per week) A to all combinations 50 B in the blue box while all those in the pink box are preferred to A. 40 H E A 30 D 20 ●G 10 Food 10 20 30 40(units per week)
The consumer prefers A to all combinations in the blue box, while all those in the pink box are preferred to A. Consumer Preferences Food (units per week) 10 20 30 40 10 20 30 40 Clothing (units per week) 50 G A H E B D
