Chapter 6 News 07
-
Upload
jeetpajwani -
Category
Documents
-
view
225 -
download
0
Transcript of Chapter 6 News 07
-
8/4/2019 Chapter 6 News 07
1/32
Chapter 6:
Consumer Choicesand Economic
Behavior
-
8/4/2019 Chapter 6 News 07
2/32
Key Topics
1. The budget constraint
a. Definition, equation, graph, opportunity cost
b. Impact ofI,Px,Py
2. Utility
a. Total and marginalb. Indifference curve: definition, slope
c. Utility maximization
-
8/4/2019 Chapter 6 News 07
3/32
Key Topics
3. Downward-sloping demand factors
a. Diminishing marginal utility
b. Income effect
c. Substitution effect
4. Other consumer decisionsa. Work or leisure
b. Save or borrow
-
8/4/2019 Chapter 6 News 07
4/32
Questions
1. What does it mean if you have a budgetconstraint?
2. How can your attainable consumptionchoices be shown mathematically andgraphically?
-
8/4/2019 Chapter 6 News 07
5/32
Budget Constraint
The maximum Qcombinations of goods
that can be purchased
given ones income andthe prices of the goods.
-
8/4/2019 Chapter 6 News 07
6/32
Budget Constraint Variables
I (or M) = the amount of income or moneythat a consumer has to spend on
specified goods and services.
X = the quantity of one specific good or one specific bundle ofgoods
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
-
8/4/2019 Chapter 6 News 07
7/32
Budget Line Equation
Income = expensesI = PxX+PYY
Y = l/PY (Px/PY)X
straight line equation
-
8/4/2019 Chapter 6 News 07
8/32
The Opportunity Set
Y
I/PYI/PY
Budget Line
PX
PY
I/PX X
-
8/4/2019 Chapter 6 News 07
9/32
Budget Line: Axis Intercepts &
Slope
Vertical Axis Intercept
= I/PY
= max Y (X = 0)
Horizontal Axis Intercept
= I/PX= max X (Y = 0)
- Slope= PX/PY= inverse P ratio
= X axis good P/Y axis good P
= Y/X
-
8/4/2019 Chapter 6 News 07
10/32
Changes in the Budget Line
Changes in Income
- Increases lead to a parallel,
outward shift in the budget line.
- Decreases lead to a parallel,
downward shift. Y
X
-
8/4/2019 Chapter 6 News 07
11/32
Changes in the Budget Line
Changes in Price
- A decrease in the price of good X rotates the
budget line counter-clockwise.
- An increase rotates the budget line clockwise.
I Px
/1
New budget line fora price decrease
X
Y
I Px
/2
-
8/4/2019 Chapter 6 News 07
12/32
Q. What Are Your Preferences?
LunchA: 1 drink, 1 pizza slice
B: 1 drink, 2 pizza slicesC: 2 drinks, 1 pizza slice
EntertainmentA: 1 movie, 1 dinner
B: 1 movie, 2 dinnersC: 2 movies, 1 dinnerFor each, indicate which of the following you prefer:
A vs B, B vs C, or A vs C
-
8/4/2019 Chapter 6 News 07
13/32
Utility Concepts
Utility:satisfaction received from consuming goods
Cardinal utility:satisfaction levels that can be measured or specifiedwith numbers (units = utils)
Ordinal utility:
satisfaction levels that can be ordered or ranked Marginal utility:
the additional utility received per unit of additionalunit of an item consumed (U/X)
-
8/4/2019 Chapter 6 News 07
14/32
Utility Assumptions
1. Complete (or continuous) can rank
all bundles of goods2. Consistent (or transitive)
preference orderings are logical and
consistent3. Consumptive (nonsatiation) more
of a normal good is preferred to less
-
8/4/2019 Chapter 6 News 07
15/32
More of a Good is Preferred to
Less
The shaded area represents those combinations of X and Y that areunambiguously 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 containmore of one good and less of the other.
-
8/4/2019 Chapter 6 News 07
16/32
Indifference Curve
Indifference Curve
A curve that defines the
combinations of 2 or more
goods that give a consumer
the same level ofsatisfaction.
Curves further from originrepresent higher utility levels
-
8/4/2019 Chapter 6 News 07
17/32
Assume Bob and Jan are students who actually ENJOYgoing to their classes and learning new things. Each havebeen asked to rank the following combinations of classesin terms of their preferences:
Combination # Econ # Math
A 2 4B 3 3
C 4 2
Preferences: Bob: a > b > cJan: c > b > a
Show and explain graphically with economic concepts.
-
8/4/2019 Chapter 6 News 07
18/32
c
b
a
Econ (#)
Math (#)
1
2
3
4
5
6
1 2 3 4 5 6
-
8/4/2019 Chapter 6 News 07
19/32
A bad good, or an economic bad is an item
that a consumer does not like or enjoy, whichmeans their total satisfaction level is lowerthe more of the item they have. This also
means the marginal utility of the item isnegative.
-
8/4/2019 Chapter 6 News 07
20/32
MRS & MU
MRS
= - slope of indifference curve= -Y/X
= the rate at which a consumer is willing toexchange 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
-
8/4/2019 Chapter 6 News 07
21/32
Consumer Equilibrium
(U Max)
The equilibrium
consumptionbundle is the
affordable bundle
that yields thehighest level ofsatisfaction.
-
8/4/2019 Chapter 6 News 07
22/32
Equal Slopes Condition
(for consumer equilibrium)
MUX/MUY = PX/PY
MUX/PX = MUY/PY
-
8/4/2019 Chapter 6 News 07
23/32
Individual Demand Curve
An individuals
demand curve isderived fromeach newequilibrium point
found on theindifference curveas the price of
good X is varied.
-
8/4/2019 Chapter 6 News 07
24/32
Diminishing Marginal Utility
The law of diminishing marginalutility:
The more of one good consumed in agiven period, the less satisfaction
(utility) generated by consuming eachadditional (marginal) unit of the samegood.
-
8/4/2019 Chapter 6 News 07
25/32
Diminishing Marginal Utility and
Downward-Sloping Demand
Diminishing marginal
utility helps toexplain why demandslopes down.
Marginal utility falls
with each additionalunit consumed, sopeople are not willingto pay as much.
40
25
15
0 5 10 25
D
Thai meals per month
Pricepermeal($)
-
8/4/2019 Chapter 6 News 07
26/32
Income and Substitution Effects of a
Price Change (for normal goods)
Household isbetter off
(higher real income)
Opportunitycost of thegood falls
Household isworse off
(lower real income)
Opportunitycost of the
good rises.
Incomeeffect
Substitutioneffect
Incomeeffect
Substitutioneffect
Householdbuys more
FALLS
RISES
Householdbuys more
Householdbuys less
Householdbuys less
Price of agood orservice
-
8/4/2019 Chapter 6 News 07
27/32
Household Choices in Labor Markets
As in output markets, households faceconstrained choices in input markets. They
must decide:1. Whether to work
2. How much to work
3. What kind of a job to work at
These decisions are affected by:
1. The availability of jobs
2. Market wage rates
3. The skill possessed by the household
-
8/4/2019 Chapter 6 News 07
28/32
The Price of Leisure
W = wage rate
= the price (or theopportunity cost or lost
benefits of either unpaidwork or leisure.
-
8/4/2019 Chapter 6 News 07
29/32
Work vs. Leisure Constraint
24W
24 Leisure (hrs/day)
Income
-
8/4/2019 Chapter 6 News 07
30/32
The Labor Supply Curve
The labor supply curveis a diagram that showsthe quantity of labor
supplied at different wagerates.
-
8/4/2019 Chapter 6 News 07
31/32
Saving and Borrowing: Present
Versus Future Consumption
Households can use present income to
finance future spending (i.e., save), or theycan use future funds to finance presentspending (i.e., borrow).
In deciding how much to save and how much
to spend today, interest rates define theopportunity cost of present consumption interms of foregone future consumption.
-
8/4/2019 Chapter 6 News 07
32/32
borrow
save
Q1(next yr)
I1/P
I0/P
Q0 (this yr)