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PowerPoint Slides prepared by:
Andreea CHIRITESCU
Eastern Illinois University
PowerPoint Slides prepared by:
Andreea CHIRI...
The Budget Constraint
• Budget constraint
–Different combinations of goods
–A consumer can afford with a limited
budget
–A...
The Budget Constraint
• Max
–Total entertainment budget = $100 per
month
–Price of a movie = $10
–Price of a concert = $20...
Figure
The Budget Constraint
4
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in...
Figure
The Budget Constraint
5
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in...
The Budget Constraint
• If
–Py: price of the good on the vertical axis
–Px: price of the good on the horizontal axis
• The...
Changes in the Budget Line
• Changes in income
–An increase in income will shift the budget
line upward (and rightward)
–A...
Changes in the Budget Line
• Changes in price
–The budget line rotates
–The slope of the budget line changes
–One of the i...
Figure
Changes in the Budget Line
9
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicate...
Preferences
• Rational preferences satisfy two
conditions:
1. Any two alternatives can be compared,
and one is preferred o...
The Marginal Utility Approach
• Utility
–Quantitative measure of pleasure/
satisfaction obtained from consuming
goods and ...
Figure
Total and Marginal Utility
12
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicat...
Figure
Total and Marginal Utility
13
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicat...
The Marginal Utility Approach
• Law of diminishing marginal utility
–As consumption of a good or service
increases, margin...
The Marginal Utility Approach
• Utility maximization
–Consumer will choose the point on the
budget line
–Where marginal ut...
Table
Total and Marginal Utility of Concerts and Movies
16
© 2013 Cengage Learning. All Rights Reserved. May not be copied...
Figure
Consumer Decision Making
17
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated...
Figure
The budget line shows the maximum number of movies Max could attend for each number of concerts
he attends. He woul...
The Marginal Utility Approach
• A rise in income
–With no change in prices
–A new quantity demanded for each good
–Individ...
Figure
Effects of an Increase in Income
20
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or du...
Figure
Effects of an Increase in Income
21
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or du...
Figure
Normal and Inferior Goods
22
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicate...
The Marginal Utility Approach
• Change in prices
–Decrease in the price of one good
• Other things constant
• Rotates the ...
Figure
Deriving the Demand Curve
24
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicate...
Figure
Deriving the Demand Curve
25
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicate...
Income and Substitution Effects
• Substitution effect
–As the price of a good falls, the consumer
substitutes that good in...
Income and Substitution Effects
• Income effect
–As the price of a good decreases, the
consumer’s purchasing power increas...
Income and Substitution Effects
• Normal goods
–Substitution and income effects work
together
–Quantity demanded - moves i...
Income and Substitution Effects
• Inferior goods
–Substitution and income effects work
against each other
–Substitution ef...
Figure
Income and Substitution Effects
30
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or dup...
Consumers in Markets
• Market demand curve
–Horizontally summing the individual
demand curves of every consumer in the
mar...
Figure
The individual demand curves show how much bottled water will be demanded by Jerry,
George, and Elaine at different...
Figure
The market demand curve in panel (b) is obtained by adding up the total quantity demanded by
all market participant...
Consumer Theory in Perspective
• Extensions of the model
–Incorporate choices among many goods
–Recognize saving and borro...
Consumer Theory in Perspective
• Behavioral economics
–Subfield of economics
–Decision-making patterns that deviate from
t...
Consumer Theory in Perspective
• Preference for defaults
–People tend to stick to the default choice
• Decision-making env...
Consumer Theory in Perspective
• Behavioral economics and policy
–Financial incentive for firms to make
“automatic contrib...
Consumer Theory in Perspective
• Behavioral economics and traditional
theory
–Traditional economic theory: assumes that
co...
Improving Education
• Model of consumer choice
–Student’s time allocation problem
–Only two activities: studying economics...
Improving Education
• Student’s time allocation problem
–Opportunity cost of scoring better in
French
• Scoring lower in e...
Improving Education
• New computer-assisted technique in
French class
–Learn more French with the same study
time or to st...
Figure
Panel (a) shows combinations of French and economics test scores that can be obtained for a
given amount of study t...
The Indifference Curve Approach
• Assumptions
–Rational preferences: an individual can
compare any two options and decide
...
An Indifference Curve
• An indifference curve
–All combinations of two goods that make
the consumer equally well off
–Slop...
Figure
An Indifference Curve
45
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, i...
An Indifference Curve
• MRS at any point on the indifference
curve
–The (absolute value of) the slope of the
curve at that...
The Indifference Map
• Indifference map
–A set of indifference curves that describe
one persons’ preferences
–Any point on...
Figure
An Indifference Map
48
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in ...
Consumer Decision Making
• Optimal combination of goods
–The point on the budget line where an
indifference curve is tange...
Figure
Consumer Decision Making with Indifference Curves
50
© 2013 Cengage Learning. All Rights Reserved. May not be copie...
What Happens When Things Change?
• A rise in income
–With no change in prices
–Leads to a new quantity demanded for
each g...
Figure
An Increase in Income
52
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, i...
Figure
Number of Concerts per Month
Number of
Movies
per Month
2
4
3 95 10
20
10
8
6
An Increase in Income
53
© 2013 Cenga...
What Happens When Things Change?
• Changes in price
–Budget line rotates
–Quantity demanded changes
–Downward sloping dema...
Figure
Deriving the Demand Curve with Indifference Curves
55
© 2013 Cengage Learning. All Rights Reserved. May not be copi...
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Chapter 6

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Chapter 6

  1. 1. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University Consumer Choice CHAPTER 1© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  2. 2. The Budget Constraint • Budget constraint –Different combinations of goods –A consumer can afford with a limited budget –At given prices • Budget line –Graphical representation of a budget constraint • Maximum affordable quantity of one good, for given amounts of another good 2 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  3. 3. The Budget Constraint • Max –Total entertainment budget = $100 per month –Price of a movie = $10 –Price of a concert = $20 • Relative price –Price of one good relative to the price of another 3 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  4. 4. Figure The Budget Constraint 4 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1
  5. 5. Figure The Budget Constraint 5 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1 Number of Concerts per Month Number of Movies per Month 8 1 2 With $100 per month, Max can afford 10 movies and no concerts, . . . 6 4 2 3 4 10 5 A B C D E F H G 8 movies and 1 concert or any other combination on the budget line. Points below the line are also affordable. But not points above the line.
  6. 6. The Budget Constraint • If –Py: price of the good on the vertical axis –Px: price of the good on the horizontal axis • Then, Px/Py is –The relative price of good X –The opportunity cost of one more unit of good X –The absolute value of the slope of the consumer’s budget line 6 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  7. 7. Changes in the Budget Line • Changes in income –An increase in income will shift the budget line upward (and rightward) –A decrease in income will shift the budget line downward (and leftward) –These shifts are parallel • Changes in income do not affect the budget line’s slope 7 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  8. 8. Changes in the Budget Line • Changes in price –The budget line rotates –The slope of the budget line changes –One of the intercepts of the budget line changes 8 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  9. 9. Figure Changes in the Budget Line 9 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 Number of Concerts per Month Number of movies per month (a) 5 10 10 20 1. An increase in income shifts the budget line rightward, with no change in slope. Number of Concerts per Month Number of movies per month (b) 5 10 20 2. A decrease in the price of movies rotates the budget line upward . . . Number of Concerts per Month Number of movies per month (c) 5 10 10 3. While a decrease in the price of concerts rotates it rightward
  10. 10. Preferences • Rational preferences satisfy two conditions: 1. Any two alternatives can be compared, and one is preferred or else the two are valued equally 2. The comparisons are logically consistent or transitive • More is better –Always choose a point on the budget line, rather than a point below it 10 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  11. 11. The Marginal Utility Approach • Utility –Quantitative measure of pleasure/ satisfaction obtained from consuming goods and services • Marginal utility –Change in total utility –From consuming an additional unit of a good or service 11 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  12. 12. Figure Total and Marginal Utility 12 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3
  13. 13. Figure Total and Marginal Utility 13 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3 Ice cream cones per week Utils 10 20 30 40 50 60 70 1 2 3 4 5 6 Ice cream cones per week Utils 10 20 30 1 2 3 4 5 6 Total Utility Marginal Utility 1. The change in total utility from one more ice cream cone . . . 2. Is called the marginal utility of an additional cone. 3. Marginal utility falls as more cones are consumed.
  14. 14. The Marginal Utility Approach • Law of diminishing marginal utility –As consumption of a good or service increases, marginal utility decreases • Marginal utility –Can be zero • Assumption –Marginal utility for every good is positive –‘More is better’ 14 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  15. 15. The Marginal Utility Approach • Utility maximization –Consumer will choose the point on the budget line –Where marginal utility per dollar is the same for both goods: MUx/Px = MUy/Py –There is no further gain from reallocating expenditures in either direction 15 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  16. 16. Table Total and Marginal Utility of Concerts and Movies 16 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1
  17. 17. Figure Consumer Decision Making 17 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4
  18. 18. Figure The budget line shows the maximum number of movies Max could attend for each number of concerts he attends. He would never choose an interior point like G because there are affordable points—on the line—that make him better off. Max will choose the point on the budget line at which the marginal utilities per dollar spent on movies and concerts are equal. From the table, this occurs at point D. Consumer Decision Making 18 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 Number of Concerts per Month Number of Movies per Month 8 1 2 6 4 2 3 4 10 5 A D F G B C E 40, 20c m c m MU MU P P   30, 30c m c m MU MU P P   20, 45c m c m MU MU P P  
  19. 19. The Marginal Utility Approach • A rise in income –With no change in prices –A new quantity demanded for each good –Individual preferences (marginal utility) • Normal good – quantity demanded increases • Inferior good – quantity demanded decreases 19 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  20. 20. Figure Effects of an Increase in Income 20 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5
  21. 21. Figure Effects of an Increase in Income 21 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 Number of Concerts per Month Number of Movies per Month 8 1 2 1. When Max's income rises to $200, his budget line shifts outward. 6 4 2 3 4 A B C D E F 10 5 6 7 8 9 14 16 18 12 20 10 G H J K L 2. If his preferences are as given in the table, he'll choose point K.
  22. 22. Figure Normal and Inferior Goods 22 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6 Number of Concerts per Month Number of Movies per Month 8 1 2 6 4 2 3 4 6 7 8 9 14 16 18 12 5 10 20 10 If income rises and concerts are inferior, Max moves to a point like K″ (fewer concerts). A B C D E F K” K K’ If income rises and movies are inferior, Max moves to a point like K′ (fewer movies).
  23. 23. The Marginal Utility Approach • Change in prices –Decrease in the price of one good • Other things constant • Rotates the budget line rightward • Individual demand curve –Quantity of a good a consumer demands at each different price 23 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  24. 24. Figure Deriving the Demand Curve 24 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7
  25. 25. Figure Deriving the Demand Curve 25 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7 Number of Concerts per month Price per Concert $5 $10 $20 3 5 8 Number of Concerts per month Number of Movies per Month 4 5 6 10 3 5 108 20 1. When the price of concerts is $20, point D is best for Max. T D R 3. And if the price drops to $5, he chooses point T. 4. The demand curve shows the quantity Max chooses at each price T D R 2. If the price falls to $10, Max's budget line rotates rightward, and he chooses point R.
  26. 26. Income and Substitution Effects • Substitution effect –As the price of a good falls, the consumer substitutes that good in place of other goods whose prices have not changed –Arises from a change in the relative price of a good –It moves quantity demanded in the opposite direction to the price change 26 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  27. 27. Income and Substitution Effects • Income effect –As the price of a good decreases, the consumer’s purchasing power increases • Causing a change in quantity demanded for the good –Arises from a change in purchasing power over both goods 27 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  28. 28. Income and Substitution Effects • Normal goods –Substitution and income effects work together –Quantity demanded - moves in the opposite direction of the price –Always obey the law of demand 28 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  29. 29. Income and Substitution Effects • Inferior goods –Substitution and income effects work against each other –Substitution effect virtually always dominates –Virtually always obey the law of demand 29 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  30. 30. Figure Income and Substitution Effects 30 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8
  31. 31. Consumers in Markets • Market demand curve –Horizontally summing the individual demand curves of every consumer in the market –Obeys the law of demand –Downward sloping 31 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  32. 32. Figure The individual demand curves show how much bottled water will be demanded by Jerry, George, and Elaine at different prices. As the price falls, each demands more. From Individual to Market Demand (a) 32 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9 Number of Bottles per Week Price Jerry$4 3 2 1 8 124 C Number of Bottles per Week Price George$4 3 2 1 9 126 C’ Number of Bottles per Week Price Elaine$4 3 2 1 2010 C”
  33. 33. Figure The market demand curve in panel (b) is obtained by adding up the total quantity demanded by all market participants at different prices. From Individual to Market Demand (b) 33 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9 Number of Bottles per Week Price 1 4410 2 $4 3 3 27 A B C D E Market Demand Curve
  34. 34. Consumer Theory in Perspective • Extensions of the model –Incorporate choices among many goods –Recognize saving and borrowing –Incorporate uncertainty and imperfect information –Behavioral economics 34 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  35. 35. Consumer Theory in Perspective • Behavioral economics –Subfield of economics –Decision-making patterns that deviate from those predicted by traditional consumer theory • Salience of a particular outcome –The extent to which it “jumps out at them” 35 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  36. 36. Consumer Theory in Perspective • Preference for defaults –People tend to stick to the default choice • Decision-making environment –Environment in which a decision is made - can exert a strong and surprising influence • Self-binding –To a narrower set of choices - long-run good 36 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  37. 37. Consumer Theory in Perspective • Behavioral economics and policy –Financial incentive for firms to make “automatic contribution” by employees the default choice –People with gambling problems - voluntarily put themselves on a list that bans them from any casino –Industry-wide “vanilla” versions of mortgages, student loans, credit card agreements 37 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  38. 38. Consumer Theory in Perspective • Behavioral economics and traditional theory –Traditional economic theory: assumes that consumers have rational preferences –Behavioral economics: analyzes decisions that violate rational preferences 38 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  39. 39. Improving Education • Model of consumer choice –Student’s time allocation problem –Only two activities: studying economics and studying French –Each of these activities costs time –Students “buy” points on their exams with hours spent studying 39 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  40. 40. Improving Education • Student’s time allocation problem –Opportunity cost of scoring better in French • Scoring lower in economics –Slope of budget line = -PF/PE = -2 • Each additional point in French: sacrifice 2 points in economics 40 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  41. 41. Improving Education • New computer-assisted technique in French class –Learn more French with the same study time or to study less and learn the same amount –A decrease in the price of French points –Budget line rotates outward 41 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  42. 42. Figure Panel (a) shows combinations of French and economics test scores that can be obtained for a given amount of study time. The slope of −2 indicates that each additional point in French requires a sacrifice of 2 points in economics. The student chooses point C. Panel (b) shows that computer-assisted French instruction causes the budget line to rotate outward; French points are now less expensive. The student might move to point D, attaining a higher French score. Or she might choose F, using all of the time freed up in French to study economics. Or she might choose an intermediate point, such as E. Time Allocation 42 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10 French score Economics score 90 70 80 75 80 (a) C French score Economics score 90 70 80 9075 80 (b) C D E F
  43. 43. The Indifference Curve Approach • Assumptions –Rational preferences: an individual can compare any two options and decide which is best • Makes choices that are logically consistent –An individual prefers more of every good to less • Consumer - choose to be on budget line, rather than below it 43 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  44. 44. An Indifference Curve • An indifference curve –All combinations of two goods that make the consumer equally well off –Slopes downward • Marginal rate of substitution, MRSy,x –Of good y for good x along any segment of an indifference curve –Is the maximum rate at which a consumer would willingly trade units of y for units of x 44 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  45. 45. Figure An Indifference Curve 45 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. A.1 Number of Concerts per Month Number of Movies per Month 6 3 4 11 20 1 2 3 4 5 If Max gets another concert . . . G H J K L +1 +1 +1 +1 -9 -5 -2 -1 He could give up 9 movies and be just as satisfied.
  46. 46. An Indifference Curve • MRS at any point on the indifference curve –The (absolute value of) the slope of the curve at that point –Maximum rate at which a consumer would willingly trade good y for a tiny bit more of good x 46 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  47. 47. The Indifference Map • Indifference map –A set of indifference curves that describe one persons’ preferences –Any point on a higher indifference curve is preferred to any point on a lower one 47 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  48. 48. Figure An Indifference Map 48 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. A.2 Number of Concerts per Month Number of Movies per Month 6 11 20 1 2 3 1.Max prefers any point on this indifference curve…G H J 2.to any point on this one.R S 3.And any point on this curve is preferred to any point on the other two.
  49. 49. Consumer Decision Making • Optimal combination of goods –The point on the budget line where an indifference curve is tangent to the budget line –That combination on the budget line for which MRSy,x = Px/Py 49 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  50. 50. Figure Consumer Decision Making with Indifference Curves 50 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. A.3 Number of Movies per Month Number of Concerts per Month 6 10 1 2 3 4 5 8 4 2 2. But point D (also affordable) is preferred because it is on a higher indifference curve. A B D E 1. Points B and E are affordable . . .
  51. 51. What Happens When Things Change? • A rise in income –With no change in prices –Leads to a new quantity demanded for each good –Quantity demanded increases (normal good) –Quantity demanded decreases (inferior good) –Depends on the individual’s preferences • Indifference map 51 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  52. 52. Figure An Increase in Income 52 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. A.4 Number of Concerts per Month Number of Movies per Month 8 4 3 65 10 20 10 1. When Max's income rises to $200, his budget line shifts outward. 2. With the preferences represented by these indifference curves, he'll choose point H. D H 3. In this case, both movies and concerts are normal goods for Max.
  53. 53. Figure Number of Concerts per Month Number of Movies per Month 2 4 3 95 10 20 10 8 6 An Increase in Income 53 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. A.4 D H’ 4. But if Max instead had these indifference curves, he would choose point H’ . . . 5. Concerts would be normal for Max, but movies would be inferior.
  54. 54. What Happens When Things Change? • Changes in price –Budget line rotates –Quantity demanded changes –Downward sloping demand curve 54 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  55. 55. Figure Deriving the Demand Curve with Indifference Curves 55 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. A.5 Number of Concerts per Month Number of Movies per Month 5 4 3 85 10 10 6 20 D K J 1. When the price of concerts is $20, MRSm,c = Pc /Pm at Point D. 2. But when the price of concerts falls to $10, this condition is satisfied at point J. Number of Concerts per Month Price per concert $5 3 85 $20 $10 D K J 3. The demand curve shows the quantity of concerts Max chooses at each price for concerts.

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  • bakhtawarmisspakistan

    Sep. 29, 2018

econ

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