The Theory of Consumer choice Chapter 21
The Theory of Consumer Choice Chapter 21
The Theory of Consumer Choice The theory of consumer choice addresses the following questions Do all demand curves slope downward? How do wages affect labor supply? How do interest rates affect household saving?
The Theory of Consumer Choice • The theory of consumer choice addresses the following questions: – Do all demand curves slope downward? – How do wages affect labor supply? – How do interest rates affect household saving?
The Budget Constraint The budget constraint depicts the consumption"bundles"that a consumer can afford People consume less than they desire because their spending is constrained, or limited b y their income e It shows the various combinations of goods the consumer can afford given his or her income and the prices of the two goods
The Budget Constraint • The budget constraint depicts the consumption “bundles” that a consumer can afford. – People consume less than they desire because their spending is constrained, or limited, by their income. • It shows the various combinations of goods the consumer can afford given his or her income and the prices of the two goods
The Budget Constraint Pints Number pending Spending Total of Pepsi of PIzzas on Pepsi on pizza sp pending 0 100 0 1,000 1,000 50 90 100 900 1.000 100 80 200 800 1,000 150 70 300 700 1.000 200 60 400 600 1.000 250 50 500 500 1,000 300 40 600 400 1.000 350 30 700 300 1.000 400 20 800 200 1.000 450 10 900 100 1.000 500 0 1,000 1.000
The Budget Constraint
The Consumers budget Constraint Quantity of Pepsi B 500 250 甲, Consumer's budget constraint 0 50 100 Quantity of pizza
Quantity of Pizza Quantity of Pepsi 0 250 50 100 500 B C A Consumer’s budget constraint The Consumer’s Budget Constraint
The Consumers budget Constraint Any point on the budget constraint line indicates the consumer's combination or tradeoff between two goods For example, if the consumer buys no pizzas, he can afford 500 pints of Pepsi (point B). If he buys no Pepsi, he can afford 100 pizzas (point A) The slope of the budget constraint line equals the relative price of the two goods, that is, the price of one good compared to the price of the other o It measures the rate at which the consumer wil trade one good for the other
The Consumer’s Budget Constraint • Any point on the budget constraint line indicates the consumer’s combination or tradeoff between two goods. • For example, if the consumer buys no pizzas, he can afford 500 pints of Pepsi (point B). If he buys no Pepsi, he can afford 100 pizzas (point A). • The slope of the budget constraint line equals the relative price of the two goods, that is, the price of one good compared to the price of the other. • It measures the rate at which the consumer will trade one good for the other
Preferences What the Consumer Wants o A consumer's preference among consumption bundles may be illustrated with indifference curves An indifference curve shows bundles of goods that make the consumer equally happy
Preferences: What the Consumer Wants •A consumer’s preference among consumption bundles may be illustrated with indifference curves. •An indifference curve shows bundles of goods that make the consumer equally happy
The Consumer's preferences Quantity of Pepsi C B A Indifference curve, I 0 Quantity of pizza
The Consumer’s Preferences Quantity of Pizza Quantity of Pepsi 0 C B A Indifference curve, I1 D I2
Preferences What the Consumer Wants The consumer's preferences The consumer is indifferent, or equally happy, with the combinations shown at points A, B and c because they are all on the same curve The marginal Rate of Substitution The slope at any point on an indifference curve is the marginal rate of substitution e It is the rate at which a consumer is willing to trade one good for another o It is the amount of one good d tha at a consumer requires as compensation to give up one unit of the other good
Preferences: What the Consumer Wants • The Consumer’s Preferences – The consumer is indifferent, or equally happy, with the combinations shown at points A, B, and C because they are all on the same curve. • The Marginal Rate of Substitution – The slope at any point on an indifference curve is the marginal rate of substitution. •It is the rate at which a consumer is willing to trade one good for another. •It is the amount of one good that a consumer requires as compensation to give up one unit of the other good
The Consumer's preferences Quantity of Pepsi B MRS Indifference A curve, I1 0 Quantity of pizza
The Consumer’s Preferences Quantity of Pizza Quantity of Pepsi 0 Indifference curve, I1 I2 1 MRS C B A D
