PB HLTH 126 Lecture Notes - Lecture 2: Consumer Choice, Budget Constraint, Marginal Cost

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Understand consumer theory and the theory of demand, including the
factors that affect demand and its elasticity
Consumer Theory
Consumer has income and they are deciding what to buy with
that income.
§
You have access to all sorts of stuff
§
Consumers have preferences for different baskets of goods that
can be ranked
§
There's a trade off
§
Higher ranked baskets have a higher utility or happiness
§
More of a good is better, but there are diminishing marginal
turns
Share a room----to have your own room
It's nice, but increases the utility cost
®
§
Maximum utility for a budget constraint occurs when MU1/P1
=MU2/P2
§
Slope of the indifference curve is the marginal rate of
substitution (MRS)
§
The opportunity cost of a choice: value of the best alternative that was not chosen
When a consumer makes a choice to consume a good or service, the
opportunity cost is the lost opportunity of consuming another good or service
with those funds
Marginal analysis helps predict how consumers, workers, and firms will act,
because they tend to make decisions on the margin
Utility-maximizing consumers subject to a budget constraint will keep
increasing untillast unit consumed is equal across all products
The demand for a good or service is based on more than just its price
Consumer theory states that individuals generate a demand schedule for
each good or service based on maximizing utility, subject to an income
>1
Price elasticity of demand will increase with the following
More substitutes
As time elapses (because more time for substitute)
If the good or service represents a large portion of income
Lecture 3
Consumer Theory, theory of the firm and market
equilibrium
Tuesday, January 29, 2019
11:12 AM
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Document Summary

Consumer theory, theory of the firm and market equilibrium. Understand consumer theory and the theory of demand, including the factors that affect demand and its elasticity. Consumer has income and they are deciding what to buy with that income. You have access to all sorts of stuff. Consumers have preferences for different baskets of goods that can be ranked. Higher ranked baskets have a higher utility or happiness. More of a good is better, but there are diminishing marginal turns. Maximum utility for a budget constraint occurs when mu1/p1. Slope of the indifference curve is the marginal rate of substitution (mrs) The opportunity cost of a choice: value of the best alternative that was not chosen. When a consumer makes a choice to consume a good or service, the opportunity cost is the lost opportunity of consuming another good or service with those funds.

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