Textbook Notes (270,000)
CA (160,000)
U of G (10,000)
ECON (700)
Chapter 5

# ECON2310 Chapter 5: Intermediate MicroEcon - Chapter 5 Notes

Department
Economics
Course Code
ECON 2310
Professor
Chapter
5

This preview shows pages 1-3. to view the full 38 pages of the document.
Chapter 5 – Constraints, Choices and Demand
02/20/2016
Learning Objectives
1. Demonstrate how price and income affect a consumers budget line
2. Determine a consumers best choice based on preferences and
budget line
3. Understand how to find a consumers best choice by maximizing a
utility function
4. Analyze the effects of changes in prices and income on a
consumer’s demand
5. Explain how economists determine consumers preferences based on
their choices
purpose of this chapter is to describe the constraints consumers
face and explain how they resolve trade-offs and make decisions.
We’ll examine 6 topics;
1. Affordable consumption bundles: consumers budget constraints
identify all the consumption bundles they can afford. We’ll see how
prices and income determine which consumption bundles are
affordable.
2. Consumer choice: faced with a budget constraint, consumers select
the best consumption bundles they can afford. We’ll explain how to
determine the best choice given preferences and budget
constraints.
3. Utility maximization: many important economic questions are
quantitative, which is why economists use mathematics. We’ll see
that a consumers best choice corresponds to the solution to a
mathematical problem involving the maximization of utility, a
concept that we introduced in Section 4.4, subject to a budget
constraint.
4. Prices and Demand: when the price of a good changes, each
consumers best affordable consumption bundle may change with it.
By studying this relationship, we will develop a better
understanding of demand curves.
find more resources at oneclass.com
find more resources at oneclass.com

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

5. Income and Demand: when a consumer’s income changes, the best
affordable consumption bundle changes. Studying this relationship
will help us understand how and why demand depends on income
6. How economists determine a consumers preferences: economists
cant observe consumers preferences directly. However, they can
observe choices. We’ll see how economists learn about consumers
preferences from their choices.
find more resources at oneclass.com
find more resources at oneclass.com

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

5.1 Affordable Consumption Bundles 02/20/2016
Income, Prices, and the Budget Line
A consumers income consists of the money he receives during some
fixed period of time.
A consumer can afford to purchase a bundle if its cost is less than
her/his income for that period
The Consumers Budget Constraint
Cost of Consumption bundle ≤ Income;
Or more formally, a bundle is affordable if its total cost does not
exceed income.
Ps S + Pb B ≤ M
When each good is available at a fixed price per unit, the budget
constraint will take the form shown in the formula above.
A bundle exhausts consumers income if its cost strictly equals
income (M)
For Finely Divisible Goods
By subtracting Ps S from both sides and then dividing everything
through by Pb, we can rewrite the formula as follows;
B= (M/Pb) – (Ps/Pb)S
This formula describes a straight line, known as the consumers
budget line. By graphing this (Figure 5.1), we can identify all of the
consumption bundles that just exhaust the consumers income
Figure 5.1 – The Budget Constraint
find more resources at oneclass.com
find more resources at oneclass.com