Consumer Choice

Learning Objectives:

• Understanding consumer opportunity and consumer preference

• How do changes in price and income influence consumer choice?

• How do workers decide how long to work?

Ordering of Consumer Preference

• Preferred choice vs. Indifferent choice

• Basic Properties: • Completeness • More is better • Diminishing marginal rate of substitution • Transitivity

Indifference Curve

• An indifference curve provides all the combinations of a set of goods giving a consumer the same level of satisfaction.

• Utility Function:

• Marginal Rate of Substitution

Budget Constraint

• A budget constraint gives the total amount of money a consumer can spend on a set of goods.

• Budget line:

• Market rate of substitution

• Movements in the budget line due to changes in income and prices

• Example: Advertisement

Consumer Equilibrium

• Marginal rate of substitution will be equal to market rate of substitution

• In equilibrium:

Comparative Statics

• Change in optimal consumption due to price and income changes

• Substitutes vs Complements

• Example: Want people to drink less? Make their cigarettes more expensive

• Example: Cheap gas makes suburban houses more valuable

• Example: What Happens to Broadway Shows After Movie Versions Hit Screens?

Comparative Statics (contd.)

• Income effect and substitution effect

• Normal Good versus Inferior Good

• Kinked choice set

• Example: Optimal product mix in a supermarket

Labor Leisure Choice

• How do workers decide how long to work?

• The economics of overtime

Individual Demand Curve

• From indifference curve to individual demand curve

• From individual demand curves to market demand curve