Consumer Choice. Learning Objectives: Understanding consumer opportunity and consumer preference How...
Transcript of Consumer Choice. Learning Objectives: Understanding consumer opportunity and consumer preference How...
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Consumer Choice
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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?
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Ordering of Consumer Preference
• Preferred choice vs. Indifferent choice
• Basic Properties: • Completeness • More is better • Diminishing marginal rate of substitution • Transitivity
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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
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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
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Consumer Equilibrium
• Marginal rate of substitution will be equal to market rate of substitution
• In equilibrium:
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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?
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Comparative Statics (contd.)
• Income effect and substitution effect
• Normal Good versus Inferior Good
• Kinked choice set
• Example: Optimal product mix in a supermarket
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Labor Leisure Choice
• How do workers decide how long to work?
• The economics of overtime
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Individual Demand Curve
• From indifference curve to individual demand curve
• From individual demand curves to market demand curve