Chapter 6:. Consumer Choices and Economic Behavior. Key Topics. The budget constraint Definition, equation, graph, opportunity cost Impact of Δ I, Δ P x , Δ P y Utility Total and marginal Indifference curve: definition, slope Utility maximization. Key Topics.
Consumer Choices and Economic Behavior
3. Downward-sloping demand factors
4. Other consumer decisions
that can be purchased given one’s income and the prices of the goods.
I (or M) = the amount of income or money that a consumer has to spend on specified goods and services.
X = the quantity of one specific good or one specific bundle of goods
Y = the quantity of a second specific good or second specific bundle of goods
Px = the price or per unit cost of X
PY = the price or per unit cost of Y
Income = expenses
I = PxX+PYY
Y = l/PY – (Px/PY)X
straight line equation
= max Y (X = 0)
= max X (Y = 0)
= ‘inverse’ P ratio
= X axis good P/Y axis good P
- Increases lead to a parallel,
outward shift in the budget line.
- Decreases lead to a parallel,
- A decrease in the price of good X rotates the budget line counter-clockwise.
- An increase rotates the budget line clockwise.
New budget line for
a price decrease
A: 1 drink, 1 pizza slice
B: 1 drink, 2 pizza slices
C: 2 drinks, 1 pizza slice
A: 1 movie, 1 dinner
B: 1 movie, 2 dinners
C: 2 movies, 1 dinner
For each, indicate which of the following you prefer:
A vs B, B vs C, or A vs C
satisfaction received from consuming goods
satisfaction levels that can be measured or specified with numbers (units = ‘utils’)
satisfaction levels that can be ordered or ranked
the additional utility received per unit of additional unit of an item consumed (ΔU/ ΔX)
The shaded area represents those combinations of X and Y that are unambiguously preferred to the combination X*, Y*. Ceteris paribus, individuals prefer more of any good rather than less. Combinations identified by “?” involve ambiguous changes in welfare since they contain more of one good and less of the other.
combinations of 2 or more
goods that give a consumer
the same level of satisfaction.
Assume Bob and Jan are students who actually ENJOY going to their classes and learning new things. Each have been asked to rank the following combinations of classes in terms of their preferences:
Preferences: Bob: a > b > c
Jan: c > b > a
Show and explain graphically with economic concepts.
Econ (#) their classes and learning new things. Each have been asked to rank the following combinations of classes in terms of their preferences:
= - slope of indifference curve
= -Y/ X
= the rate at which a consumer is willing to exchange Y for 1more (or less) unit of X
U = 0 along given indiff curve
= MUx(X)+MUY(Y) = 0
= - Y/ X = MUx/MUY
= - slope = inverse MU ratio
bundle is the
that yields the
highest level of satisfaction.
The more of one good consumed in a given period, the less satisfaction (utility) generated by consuming each additional (marginal) unit of the same good.
Price per meal ($)
Thai meals per month
Price of a
(higher real income)
cost of the
(lower real income)
cost of the
As in output markets, households face constrained choices in input markets. They must decide:
These decisions are affected by:
= the price (or the opportunity cost or lost benefits of either unpaid work or leisure.
Q normal goods)1
Q0 (this yr)