Intermediate Microeconomic Theory I
ECON 2300 – Summer 2011 – Mark Melatos
Topic 2 – Consumer Choice – May 19
- Individual tastes (preferences) determine the pleasure (‘utility’) people derive
from the goods and services they consume.
- Consumers’ choice are constrained (e.g. by income).
- Consumers maximise utility subject to their constraints.
- Properties of consumer preferences:
o Non-satiation (‘more is better’)
- Some fundamental concepts
o Market basket
o Indifference curve
- Marginal rate of substitution (MRS)
o Slope of the IC at a given market basket.
o The amount of one good a consumer is willing to give up obtaining more
of another good.
- Consumers can rank market baskets according to which give them the most
- Can assign a numerical value to each basket that reflects the pleasure derived.
o I.e. higher utility more pleasure.
- Assumption: ‘utility is an ordinal, not a cardinal measure’.
Marginal Utility and the MRS
- Marginal utility (MU): measures the extra satisfaction obtained from consuming
an extra unit of a good, holding the amount of the other good fixed.
The Budget Constraint (BC)
- So far, looked at consumer tastes/preferences.
- Now, look at what consumers can afford.
- BC all combinations of goods (i.e. market baskets) for which total expenditure
= total income.
The Consumer’s Problem