Chapter 21 Consumer Choice
Properties of indifference curves (4)
1) higher indifference curves are preferred to lower ones 2) indifference curves are downward sloping 3)curves do not cross (impossible for them to cross) 4) curves are bowed inward--> Thus, the bowed shape of the indifference curve reflects the consumer's greater willingness to give up a good that she already has a lot of.
Change in Income: higher income
afford more of both goods, budget constraint outward (more to the right)...price of goods ahas not changed, slope of budget constraint is the same...Shape and size remains the same, can now choose a better combination, new optimum *change in consumption that results from the movement to an new indifference curve
do all demand curves slope downward
can sometimes slope up...a gifen good, they are inferior goods which the income effect dominates the substitituion effect, potatoes are giffen goods
substitution effect
change in consumption that results from moving to anew point on the same indifference curve with a new MRS
The optimal Choice
combination on highest indifference curve, but must also be on her budget constraint --> measuring total resources
Demand curve
consumer's demand curve asa summary of the optimal decisions that arise from her budget constraint and indifference curves demand curve comes from consumer choice
Perfect complements
curves are right angles, you judge a bundle based on how many pairs you could assemble, no value of getting if there is no left shoe
Impact of a change in the price of a good on consumption based on (2)
income effect and substitution effect
Inferior Good
income rises and you want less of it, ex: bus rides
Normal Good
income rises, consumer wants more
consumer preferences represented by
indifference curves
income effect
is the change in consumption that results from the movement to a new indifference curve.--> movement to a completely new curve
perfect substitutes Indifference curves
less bowed--> have similar willingness to trade one good for another, probably really only care about difference in monetary value (MRS of NICKLE and Dimes = 2, always... curves are straight lines
budget constraint
people consume less than desired because they are constrained, shows consumption bundles that the consumer can affor
optiumum
point where indifference curve and budget constraint touch, outcome--> can afford it but consumer has less satisfaction
Changes in price
price drop, consumer wants more--> pull outwards
indifference curves
show various bundles of consumption that make the consumer equally happy
Marginal Rate of Sub
slop of indifference at different points, rate at which the consumer is willing to sub one good for the other.... The slope of an indifference curve is the marginal rate of substitution—the rate at which the consumer is willing to trade off one good for the other.
optimum
slope of budget constraint= slope of indifference curve The slope of the indifference curve is the marginal rate of substitution between pizza and Pepsi, and the slope of the budget constraint is the relative price of pizza and Pepsi. consumer chooses consumption of the two goods so that the marginal rate of substitution equals the relative price.
budget constraint equals
the relative price of 2 goods
indifference between bundles
the two bundles suit tastes equally
the essence of time allocation
trade off between leisure and consumption
the optimum
where MRS= relative price relative price--> based on what market is willing to trade MRS--> what consumer is willing to trade Markets value = consumers value