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Household as a consumer
decisions
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Questions
Explanation of the demand curve
Why is PQ relationship inverse?Can it become positive?If so when?
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The economic process
The „best that the consumer can „afford .
„best : in terms of -------preference.
„Afford : in terms of -------budget.Budget constraint : one good and the rest,
or one good and another good with a fixedamount to spend.
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The process
Matching Preferences to opportunities.
So we require ---Preference set andOpportunity set.
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If there is one commodity and an incomeconstraint, how would one decide how muchto consume?
Two questions:
- how much can I afford?- what is my preference? To help arrive at the“best”
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Preference expressed through „ utility .
Consumer is „rational and so wants tomaximize utility.
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Utility
Measurement issues?
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Measurement
Cardinal
ordinal
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Axioms
Completeness- any two bundles can be
compared.TransitivityMore is preferred to less.
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Optimizing rule
When there is no income constraint and noprice to pay: Maximize Total utility
When there is one commodity, an incomeconstraint and price
MU = PWhen there is more than one commodity ,each with a different price and an incomeconstraint: Equimarginal principle
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Getting to the demand curve
Using the Equimarginal Principle:
MUx / Px = MUy / Py= …..= MU per Re of income.
What happens if Px rises?
The inverse Price-Quantity relationship-Demand curve
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The “ordinal” school
Challenges the cardinal school
Considers „baskets Derives a preference set based on „Ordinal”measurement- How?
„INDIFFERENCE CURVE depicting „well –behaved preferences. ( more is preferred toless)
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Getting an Indifference curve
Derive combinations of the two goods which
yield a particular level of satisfaction / utility.
How does it look?
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Properties of Indifference curves
Downward sloping to keep the level of utility
constant – more is preferred; „more takesone to a higher Ind curve.
Convex to the origin
Non intersecting
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Slope of the indifference curves
Marginal rate of substitution
If decreasing- what is the shape?If increasing ?If constant?
Any other?
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A decreasing MRS is the kind of ind curvethat we are concerned with.14 410 58 66 85 12
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Map of Indifference curves
Captures the preference set.
The Budget line- Opportunity setSlope of the budget line?
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The opportunity set
The Budget Equation:
P 1x1+ P 2x2 less than or equal to m.Vertical Intercept : m / P 1 (rise)Horizontal intercept: m / P 2 (run)
Rise / run = - P 2/P 1
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Optimal choice
The highest indifference curve that the
consumer can get to with the budgetconstraint.Point of tangency
Feature of this point of tangency.
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Change in slope of the budget line
To get the optimal choice at another price
Derive the demand from these two points of optimal choice?
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Price consumption curve or Price offer
curve
Set of optimal choice combinations for
different prices of X .
Slope of this PCC.Northeasterly? Northwesterly?How does the demand curve look for each of the PCCs?
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Demand curve from PCC curve
Northeasterly sloped PCC
Demand – Downward sloping
Northwesterly sloped PCC
Demand curve for X is upward sloping.
We need to see h ow this happens and w h y this happens
