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economics for consumption behaviour
Typology: Lecture notes
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Quantity of Fish Quantity of Mangos Indifference curve : shows consumption bundles that give the consumer the same level of satisfaction A , B , and all other bundles on I 1 make Hurley equally happy – he is indifferent between them. I 1 One of Hurley’s indifference curves B A
Quantity of Fish Quantity of Mangos Hurley prefers every bundle on I 2 (like C ) to every bundle on I 1 (like A ). A few of Hurley’s indifference curves I 1 I 2 I 0 D
2. Higher indifference curves are preferred to lower ones. He prefers every bundle on I 1 (like A ) to every bundle on I 0 (like D ). C A
Quantity of Fish Quantity of Mangos Suppose they did. Hurley should prefer B to C , since B has more of both goods. Yet, Hurley is indifferent between B and C : He likes C as much as A (both are on I 4 ). He likes A as much as B (both are on I 1 ). Hurley’s indifference curves I 1
3. Indifference curves cannot cross. B C I 4 A
Quantity of Fish Quantity of Mangos Hurley’s MRS is the amount of mangos he would substitute for another fish. I 1 1 1 6 2 A B Marginal rate of substitution (MRS) : the rate at which a consumer is willing to trade one good for another. MRS = slope of indifference curve MRS = MRS = MRS falls as you move down along an indifference curve.
The Budget Constraint: What the Consumer Can Afford
= 300 fish B. $1200/$ = 1200 mangos C. 100 fish cost $400, $800 left buys 800 mangos A C T I V EA C T I V E^ L E A R N I N GL E A R N I N G^^11
Quantity of Fish Quantity of Mangos A B C D. Hurley’s budget constraint shows the bundles he can afford. D. Hurley’s budget constraint shows the bundles he can afford.
Quantity of Fish Quantity of Mangos D From C to D , “rise” = –200 mangos “run” = +50 fish Slope = – 4 Hurley must give up 4 mangos to get one fish. C
A C T I V EA C T I V E^ L E A R N I N GL E A R N I N G^^22
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Now, Hurley can buy $800/$ = 200 fish or $800/$ = 800 mangos or any combination in between. A C T I V EA C T I V E^ L E A R N I N GL E A R N I N G^^22
Quantity of Fish Quantity of Mangos A fall in income shifts the budget constraint down. A fall in income shifts the budget constraint down.
Quantity of Fish Quantity of Mangos 1200 600 150 300 A is the optimum : the point on the budget constraint that touches the highest possible indifference curve. Hurley prefers B to A , but he cannot afford B. A C D Hurley can afford C and D , but A is on a higher indifference curve. B The optimum is the bundle Hurley most prefers out of all the bundles he can afford. The optimum is the bundle Hurley most prefers out of all the bundles he can afford.
Quantity of Fish Quantity of Mangos 1200 600 150 300 At the optimum, slope of the indifference curve equals slope of the budget constraint: MRS = P F / P M (^) A marginal value of fish (in terms of mangos) price of fish (in terms of mangos) Consumer optimization is another example of “thinking at the margin.” Consumer optimization is another example of “thinking at the margin.”
500 350
Quantity of Fish Quantity of Mangos 1200 600 150 300 600 initial optimum new optimum Initially, P F = $ P M = $ P F falls to $ budget constraint rotates outward, Hurley buys more fish and fewer mangos.
The Income and Substitution Effects
