Chapter 21: The Theory of Consumer Choice
Microeconomics
Chapter 21: The theory of consumer choice
After developing the basic theory of consumer choice, we apply it to three questions about households decisions
1) Do all demand curves slope downward?
2) How do wages affect labour supply?
3) How do interest rates affect households saving?
The budget constraint: What the consumer can afford
-People consume less than they desire because their spending is constrained or limited by their income
Budget constraint: the limit on the consumption bundles that a consumer can afford
-The slope of the budget constraint measures the rate at which the consumer can trade one good for the other
Preferences: What the consumer wants
-The budget constraint is one piece of the analysis: it shows what combination of goods the consumer can afford given his income and the prices of the goods
-The consumers’ choice, however, depend not only on his budget constraint but also on his preferences regarding the two goods
-The consumer’s preferences are the next piece of our analysis
Representing Preferences with Indifference Curves
Indifference curve: a curve that shows consumption bundles that give the consumer the same level of satisfaction
-The slope at any point on an indifference curve equals the rate at which the consumer is willing to substitute one good for the other
Marginal rate of substitution: the rate at which a consumer is willing to trade one good for another
-Because the indifference curve are not straight lines, the marginal rate of substitution is not the same at all points on a given indifference curve
-The rate at which a consumer is willing to trade one good for the other depends on the amounts of the goods he is already consuming
-The consumer is equally happy at all points on any given indifference curve, but he prefers some indifference curve to others
-A consumer’s set of indifference curves gives a complete ranking of the consumer’s preferences
-We can use the
Chapter 21: The theory of consumer choice
After developing the basic theory of consumer choice, we apply it to three questions about households decisions
1) Do all demand curves slope downward?
2) How do wages affect labour supply?
3) How do interest rates affect households saving?
The budget constraint: What the consumer can afford
-People consume less than they desire because their spending is constrained or limited by their income
Budget constraint: the limit on the consumption bundles that a consumer can afford
-The slope of the budget constraint measures the rate at which the consumer can trade one good for the other
Preferences: What the consumer wants
-The budget constraint is one piece of the analysis: it shows what combination of goods the consumer can afford given his income and the prices of the goods
-The consumers’ choice, however, depend not only on his budget constraint but also on his preferences regarding the two goods
-The consumer’s preferences are the next piece of our analysis
Representing Preferences with Indifference Curves
Indifference curve: a curve that shows consumption bundles that give the consumer the same level of satisfaction
-The slope at any point on an indifference curve equals the rate at which the consumer is willing to substitute one good for the other
Marginal rate of substitution: the rate at which a consumer is willing to trade one good for another
-Because the indifference curve are not straight lines, the marginal rate of substitution is not the same at all points on a given indifference curve
-The rate at which a consumer is willing to trade one good for the other depends on the amounts of the goods he is already consuming
-The consumer is equally happy at all points on any given indifference curve, but he prefers some indifference curve to others
-A consumer’s set of indifference curves gives a complete ranking of the consumer’s preferences
-We can use the