Slides 1 Consumers

8/12/2019 Slides 1 Consumers

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DAMIEN KINGUniversity of the West Indies, J

Consumer

Choice1


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?

?

?

Why does the demand curvedownward?

Think of your favourite restadish. Why do you not have iday?How come higher wages socause people to work less?


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2

1

3

Budget ConstraintWhat you can afford

PreferencesWhat you like

OptimizingMaking the best choice

Outline


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Budget Constraint

What can you affor


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Weekly income = $1,0

Price of a beer = $200 Price of a patty = $100

BudgetInformatio

n


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=All the

combinations of

patties andbeer that

can beafforded


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7

6

5

4

3

2

1

0

8

1 2 3 4 5 6 7 8 90 10


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4

3

2

1

0

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1 2 3 4 5 6 7 8 90 10

BudgetConstraint


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6

5

4

3

2

1

0

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1 2 3 4 5 6 7 8 90 10

SueInc

Ri


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6

5

4

3

2

1

0

8

1 2 3 4 5 6 7 8 90 10

BeersQuantit

y Co

6 125 104 803 602 401 20


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6

5

4

3

2

1

0

8

1 2 3 4 5 6 7 8 90 10

A cinincshthebu

lin


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3

2

1

0

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1 2 3 4 5 6 7 8 90 10

A cinincshthebu

lin

The furtheraway from the

origin, themore youcan afford.


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6

5

4

3

2

1

0

8

1 2 3 4 5 6 7 8 90 10

Sue tpr

a pris


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6

5

4

3

2

1

0

8

1 2 3 4 5 6 7 8 90 10

BeersQuantit

y Co

5 104 803 602 401 200 0


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6

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2

1

0

8

1 2 3 4 5 6 7 8 90 10

A c

in chthe

thebulin


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3

2

1

0

8

1 2 3 4 5 6 7 8 90 10

MaPra P

(in

= $100 =


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5

4

3

2

1

0

8

1 2 3 4 5 6 7 8 90 10

MaPra P

(in

The cost of thehorizontal goodequals the slope

of the line.


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6

5

4

3

2

1

0

8

1 2 3 4 5 6 7 8 90 10

MaPra P

(in1


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P

YAmount of purchasing powehaveDistance of the line from the originBudget

lineprovides

the

followinginformatio

n

Rate at which you can tradeThe slope of the line


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Preferences

What you like.


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All the

combinations of

patties andbeer

amongstwhich you

are

indifferent

Equally happywith either

bundle


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Thesubjectiv

e valueof a pattychanges 1/3 of a beer

1 beer

2 beers

Marginal Rateof Substitution


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6

5

4

3

2

1

0

8

1 2 3 4 5 6 7 8 90 10


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6

5

4

3

2

1

0

8

1 2 3 4 5 6 7 8 90 10

Indifference Curve


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IndifferenceCurve

A curve linking all thecombinations of twocommodities that a

consumer regards asproviding equal

satisfaction


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6

5

4

3

2

1

0

8

1 2 3 4 5 6 7 8 90 10

MR

sloindce

21

MarginalRate ofSubstitution


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6

5

4

3

2

1

0

8

1 2 3 4 5 6 7 8 90 10

Choose a distarting po


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3

2

1

0

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1 2 3 4 5 6 7 8 90 10

Hig

Indcepre


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6

5

4

3

2

1

0

8

1 2 3 4 5 6 7 8 90 10

Ind

ce


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An

inde mpa

to pe

This

personlikespatties


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An

inde mpa

to pe

This

personprefersbeer


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6

5

4

3

2

1

0

8

1 2 3 4 5 6 7 8 90 10

Co


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6

5

4

3

2

1

0

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1 2 3 4 5 6 7 8 90 10

Do

d s


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No

intng

3

6

2

7

5

4

B

C

A


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Optimizing

Making the best cho


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We know what y

can afford. We kwhat you like. Swhat are youactually going toconsume?


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ThBeCh


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Th

BeCh

1

8

2

6


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Th

BeCh3

4


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FoodHousing Would ha

live in cabox to aflobster

Cant afflobster ahousing

fast food lobster

Monahouse


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Why a gift baske

sub-optimal.


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C3

4

B4

2

GiftBasket

Best useof cash


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Changing Incom

and Prices


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An

Incin

Inc

6

4

7

5


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Income EffectThe effect of a change inpurchasing power on the

quantities of commodities

consumedThe income effect is usually positive


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An

IncinInc


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An

IncinIncInfGo


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Normal v Inferior

GoodWhereas for a normal

good, an increase in

income causes quantityconsumed to rise, for aninferior good,

consumption will fall


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A

ChinRePr(pa

h

A

B


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Substitution EffectThe effect of a change in

relative price on thequantities of commodities

consumedThe substitution effect is always negative


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Inc

Sun E


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A R

theof B

A


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?

?

?

If the price of phone calls goyou spend more or less on cIf the cost of textbooks rises

your spending on entertainmchange?When energy costs fall, is it that people spend less on e

Applicatio

ns ofIncomeand

Substitution Effects


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Suppose studyin

gets easier, do ystudy more or tamore time off?

rs)


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An

Apn tStu

Studying (in pages)

Leisure(inhour

rs)


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Studying (in pages)

Leisure(inhou

Leis

10

9

87

6

5

4

3

21

0

3 pagesper hour

rs)


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Studying (in pages)

Leisure(inhou

Leis

10

9

87

6

5

4

3

21

0

4 pagesper hour

urs)


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Inc

SuonEff

Stu

BA

Studying (in pages)

Leisure(inhou

Subst

Subst

Incom

e

Income

urs)


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Inc

SuonEff

Stu

BA

Studying (in pages)

Leisure(inhou

Subst

Subst

Incom

e

Income


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How would you

respond to a higwage?

on


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9000

8000

7000

6000

5000

4000

3000

20001000

2 4 6 8 10 12 14 160

0

Th

LaLeCh

16 14 12 10 8 6 4 2 0

Leisure

Work

Co

s.

Hours

Money

on


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9000

8000

7000

6000

5000

4000

3000

20001000

2 4 6 8 10 12 14 160

0

16 14 12 10 8 6 4 2 0

Leisure

Work

Co

s.

Wage Rate

on


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9000

8000

7000

6000

5000

4000

3000

20001000

2 4 6 8 10 12 14 160

0

16 14 12 10 8 6 4 2 0

Leisure

Work

Co

s.

Wage Rate

Wage Rate

ons.


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Re

sePaRa

Leisure

Co

Subst

Subst

Incom

e

Income

You willchoose toearn more

Will youchoose to

workmore?


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Consumption choices reflec


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2

1Consumption choices reflechighest level of satisfaction affordability allows.Changes in prices have bothand substitution effects.

Documents

Slides 1 Consumers