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Consumer Choice

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ECON 1050

Lectures 13 and 14 ECON1050 Page 1 MICROECONOMICS Consumer ChoiceFocusconsumer possibilities preferences and choicesbudget line and indifference curvespredicting the effects of wage prices and income on workleisure choicesConsumption Possibilitiesbudget line describes the limits to household consumption choices o constrained by income and prices of available goods and services o assume that all income is spentno savings o a person can afford any point on or inside the budget linebudget equation expenditureincome o PQPQY 1122 Pprice Q quantity Yincome o QYP PPQ 11 212 real income YP is consumers real income in terms of good 1 1 relative price PP is relative price of good 2 in terms of good 1 21 real income income expressed as a quantity of goods the household can afford o yintercept is real income wrt good on the xaxis xintercept wrt to yaxisrelative price price of a good in terms of the price of another good o magnitude of budget line slope marginal cost Price Changesprice affordable quantity of that good o xaxis price causes an inward rotation of the budget line and slope o yaxis price causes an inward rotation of the budget line and slopeIncome Changesincome changes cause parallel shifts of the budget line o slope does not change because relative price remains constantPreferences and Indifference Curvesindifference curve shows combinations of goods that a consumer feels are of equal value o consumer indifferent between consumption at any two points on the curvespecific to every individual consumer based on preferences o points above the indifference curve are preferred to those on the curve o points below the curve are seen as inferior to those on the curvepreference map series of indifference curves o any point on a higher curve is preferable to any point on a lower oneto get to a higher indifference curveincome must increase budget line must shift rightwardprice drop must occur budget line must rotate outwards
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