EC120 Lecture Notes - Lecture 21: Budget Constraint, Indifference Curve, Demand Curve

• School: WLU
• Department: Economics
• Course: EC120
• Professor: Hideki Ariizumi

Document Summary

The budget constraint: what the consumer can afford. The study of consumer choice starts by examining the link between income and spending. People consume less than they desire because their spending is constrained, or limited, by their income. Hurley"s i(cid:374)(cid:272)o(cid:373)e: (cid:1006)(cid:1004)(cid:1004)(cid:1004: prices: pf= per fish, pm= per mango. The (cid:272)o(cid:374)su(cid:373)er"s (cid:272)hoi(cid:272)es, ho(cid:449)e(cid:448)er, depe(cid:374)d (cid:374)ot o(cid:374)ly o(cid:374) his (cid:271)udget (cid:272)o(cid:374)strai(cid:374)t (cid:271)ut also o(cid:374) his preferences regarding the two goods. Therefore, the (cid:272)o(cid:374)su(cid:373)er"s preferences are the next piece of our analysis. Indifference curve: a curve that shows consumption bundles that give the consumer the same level of satisfaction. The (cid:272)o(cid:374)su(cid:373)er"s prefere(cid:374)(cid:272)es allo(cid:449) hi(cid:373) to (cid:272)hoose a(cid:373)ong different bundles of pepsi and pizza. If you offer the consumer two different bundles, he chooses the bundle that best suits his taste. If the two bundles suit his tastes equally well, we say that the consumer is indifferent between the two bundles.