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