Week 2
Consumer choice
Overview
Main points
Scarce resources mean people face tradeoffs and must make choices about how to allocate
them. People’s choices reflect their income, relative prices and their preferences. How do
people choose what to spend their money on? How much to work? How much to save?
Four elements in consumer choice
The theory of consumer choice helps us to understand and explain consumers’ choices.
Four elements used to build this theory are:
- Consumer’s income
- Prices of good
- Consumers preferences
- Rationality
The assumption that consumers choose so as to maximise their utility (satisfaction).
The budget constraint
The budget set
People have limited incomes. A larger income, ceteris paribus, allows people to purchase more.
The quantity a person can purchase depends on:
- Their income and product prices
- Income and prices together determine the possible bundles of goods that a consumer
can afford
- The budget set is all different bundles of goods that a consumer can afford
- It can be shown graphically as an area
The budget set (2)
Consider a student with a budget of $50 to spend on meals and films. Films cost $10 and meals
$5. What combinations of meals and films can they afford?
