Transcript Document

Consumer Choice
ECONOMICS: Principles and Applications 3e
HALL & LIEBERMAN
© 2005 Thomson Business and Professional Publishing
Figure 1 The Budget Constraint
Number of
Movies per
Month
15
With $150 per month, Max
can afford 15 movies and
no concerts, . . .
A
12 movies and 1 concert or any other
combination on the budget line.
B
12
Points below the line are
H also affordable.
C
9
D
6
G
E
3
But not points
above the line.
F
1
2
3
4
5 Number of
Concerts
per Month
Figure 2 Changes in the Budget
Line
(a)
Number of Movies
per Month
1. An increase in income shifts
the budget line rightward, with
no change in slope.
30
15
5
10
15
Number of
Concerts per
Month
Figure 2 Changes in the Budget
Line
(b)
Number of Movies
per Month
2. A decrease in the price of
movies rotates the budget line
upward.
30
15
5
15
Number of
Concerts per
Month
Figure 2 Changes in the Budget
Line
(c)
Number of Movies
per Month
3. while a decrease in the price of
concerts rotates it rightward.
30
15
5
15
Number of
Concerts per
Month
Figure 3 Total and Marginal Utility
Utils 70
60
50
40
30
20
10
Total Utility
1. The change in total utility from
one more ice cream cone . . .
1
Utils
30
20
10
2
3
4
5
6
Ice Cream Cones per Week
2. is called the marginal utility
of an additional cone.
3. Marginal utility falls
as more cones are
consumed.
Marginal Utility
1
2
3
4
5
6
Ice Cream Cones per Week
Figure 3 Total and Marginal Utility
(continued)
Figure 4 Consumer Decision
Making
Number of
Movies per
Month
15
MUconcerts
 40,
Pconcerts
A
MUconcerts
 20,
Pconcerts
B
12
MUmovies
 15
Pmovies
MUconcerts
 15,
Pconcerts
C
9
MUmovies
 20
Pmovies
MUmovies
 35
Pmovies
D
6
G
E
3
F
1
2
3
4
5
Number of
Concerts per
Month
Figure 4 Consumer Decision
Making (continued)
Figure 5 Effects of an Increase in
Income
Number of 30
Movies per 27
Month
1. When Max's
income rises
to $300, his
budget line
shifts
outward.
15
12
9
6
3
2. If his preferences are as given
in the table, he'll choose point H
H''
A
B
3.But different marginal
utility numbers could
lead him to H' or H''
H
C
D
E
F
H'
1 2 3 4 5 6 7 8 9 10
Number of Concerts
per Month
Figure 5 Effects of an Increase in
Income (continued)
Figure 6 Deriving the Demand
Curve
1. When the price of concerts is
$30, point D is best for Max.
Number of 15
Movies per
Month 10
8
6
K
J
D
0
3
Price per $30
Concert
5
7
10
15
30
3. And if the price drops to
$5, he chooses point K.
D
J
10
5
K
3
2. If the price falls to
$10, Max's budget
line rotates
rightward, and he
choose point J.
7
10
4. The demand curve shows
the quantity Max chooses
at each price.
Number of Concerts
per Month
Figure 6 Deriving the Demand
Curve (continued)
Figure 7 Income and Substitution
Effects
Ultimate
Effect
(Almost Always)
Price Decrease:
P
Substitution Effect
Purchasing
Power
QD
QD
QD
if normal
if inferior
 QD
Price Increase:
P
Substitution Effect
Purchasing
Power
QD
QD
if normal
QD
if inferior
 QD
Figure 8 From Individual to
Market Demand
(a)
Jerry
George
Price
Elaine
Price
Price
$4
$4
$4
3
3
3
+
c
2
+
C'
2
1
1
0
4
12
=
C''
2
1
0
6
12
0
Number of Bottles per Week
10
20
Figure 8 From Individual to
Market Demand
(b)
Price
A
$4
Market Demand
Curve
B
3
C
2
D
1
E
3
10
27
44
Number of Bottles per Week
Figure 9 Time Allocation
(a)
(b)
Economics
Score
Economics
Score
90
90
F
E
80
70
80
C
75
80
French Score
70
D
C
75
80
90
French Score
Figure A.1 An Indifference Curve
Number of Movies 20
per Month
1. If Max gets another concert…
+1
G
-9
3. For Max, points G
and H are on the
same indifference
curve.
2. he could give up 9 movies
and be just as satisfied.
+1
11
H
-5
+1 -2
J
+1 -1
K
L
6
4
3
1
2
3
4
5
4. The indifference curve gets
flatter moving rightward and
downward along the curve.
Number of Concerts
per Month
Figure A.2 An Indifference Map
1. Max prefers any point on
this indifference curve….
Number of Movies 20
per Month
G
2. to any point on
this one
3. And any point on this
curve is preferred to
any point on the other
two.
R
11
H
S
J
6
1
2
3
Number of Concerts
per Month
Two Mistakes with Indifference
Curves
Figure A.3 Consumer Decision
Making with Indifference Curves
Number of Movies
per Month
1. Points B
and E are
affordable.
15
12
A
2. but point D--on a higher
indifference curve--is preferred.
B
9
3. At Max's best possible
point, the budget line
and indifference curve
are tangent.
D
6
3
E
1
2
3
4
5
Number of Concerts
per Month
Figure A.4 An Increase in Income
30
1. When Max's income rises to
$300, his budget line shifts
outward.
H''
Number of Movies
per Month
15
12
3. But different
preferences could
lead him to H'' or H'.
H
6
D
3
2. If his preferences are shown
by these two indifference
curves, he'll choose point H.
H'
5 6
10 Number of Concerts
per Month
Figure A.5 Deriving the Demand
Curve
(a)
Number of 15
Movies per
Month 10
8
6
1. When the price of concerts was $30,
Pconcerts
MRSmovies, concerts 
at point D.
Pmovies
K
D
J
1234567
Price per $30
Concert 25
20
15
10
5
2. But when the price of concerts
falls to $10, their condition is
satisfied at point J.
10
D
15
(b)
J
K
1234567
10
30
Number of Concerts
per Month
3. The demand curve shows the
quantity of concerts Max chooses
at each price for concerts.
Number of Concerts
per Month