ECONOMICS: Principles and Applications 3eHALL & LIEBERMAN© 2005 Thomson Business and Professional Publishing

Consumer Choice

Figure 1 The Budget Constraint

A

B

G

H

Number of Concerts

per Month

Number of Movies per

Month

15

12

9

6

3

1 2 3 4 5

With $150 per month, Max can afford 15 movies and no concerts, . . .

12 movies and 1 concert or any other combination on the budget line.

Points below the line are also affordable.

But not points above the line.

D

F

E

C

Figure 2 Changes in the Budget Line

1. An increase in income shifts the budget line rightward, with no change in slope.

(a)

Number of Concerts per

Month5

15

15

Number of Movies per Month

30

10

Figure 2 Changes in the Budget Line

2. A decrease in the price of movies rotates the budget line upward.

(b)

Number of Concerts per

Month5

15

15

Number of Movies per Month

30

Figure 2 Changes in the Budget Line

3. while a decrease in the price of concerts rotates it rightward.

Number of Concerts per

Month5

15

15

Number of Movies per Month

30

(c)

Figure 3 Total and Marginal Utility

Total Utility

Marginal Utility

Utils 302010

Ice Cream Cones per Week1 2 3 4 5 6

Utils605040

70

302010

Ice Cream Cones per Week1 2 3 4 5 6

1. The change in total utility from one more ice cream cone . . .

2. is called the marginal utility of an additional cone.

3. Marginal utility falls as more cones are consumed.

Figure 3 Total and Marginal Utility (continued)

Figure 4 Consumer Decision Making

A

B

C

D

EG

F

15

12

9

6

3

1 2 3 4 5 Number of Concerts per

Month

Number of Movies per

Month15

PMU 40,

PMU

movies

movies

concerts

concerts

20P

MU 20,P

MUmovies

movies

concerts

concerts

35P

MU 15,P

MUmovies

movies

concerts

concerts

Figure 4 Consumer Decision Making (continued)

Figure 5 Effects of an Increase in Income

1. When Max's income rises to $300, his budget line shifts outward.

H'

H''

H

3027

1512

963

1 2 3 4 5 6 7 8 9 10 Number of Concerts per Month

Number of Movies per

Month

2. If his preferences are as given in the table, he'll choose point H

3.But different marginal utility numbers could lead him to H' or H''

AB

C

DE

F

Figure 5 Effects of an Increase in Income (continued)

Figure 6 Deriving the Demand Curve

JD

D

JK

2. If the price falls to $10, Max's budget line rotates rightward, and he choose point J.

3. And if the price drops to $5, he chooses point K.Price per

Concert $30

105

3 7 10 Number of Concerts per Month

15

6

3 5 15 300

108

7 10

Number of Movies per

Month K

4. The demand curve shows the quantity Max chooses at each price.

1. When the price of concerts is $30, point D is best for Max.

Figure 6 Deriving the Demand Curve (continued)

Figure 7 Income and Substitution Effects

Price Decrease:

P

Purchasing Power

QD

QD

QD

if normalif inferior

Substitution Effect

UltimateEffect

(Almost Always)

QD

Price Increase:

P QD

QD

QD

if normal

if inferior

Substitution Effect

QDPurchasing

Power

Figure 8 From Individual to Market Demand

Number of Bottles per Week

(a)

c

4 12

JerryPrice

$4

0

3

2

1

C'

GeorgePrice

0 6 12

$4

3

2

1

C''

ElainePrice

0 10 20

$4

3

2

1

+ + =

Figure 8 From Individual to Market Demand

(b)

A

C

B

D

E

Market Demand Curve

Price$4

3

2

1

3 10 27 44Number of Bottles per Week

Figure 9 Time Allocation

C

FE

DC

Economics Score

French Score

90

70

80

75 80

(a)

90French Score

90

70

80

75 80

(b)

Economics Score

Figure A.1 An Indifference Curve

+1

-9

20

11

643

1 2 3 4 5 Number of Concerts per Month

Number of Movies per Month

JK

G

H

L

-5

-2-1+1

+1

+1

2. he could give up 9 movies and be just as satisfied.3. For Max, points G

and H are on the same indifference curve.

4. The indifference curve gets flatter moving rightward and downward along the curve.

1. If Max gets another concert…

Figure A.2 An Indifference Map

G

1 2

J

R

S

3

H

20

11

6

1. Max prefers any point on this indifference curve….

2. to any point on this one

3. And any point on this curve is preferred to any point on the other two.

Number of Concerts per Month

Number of Movies per Month

Two Mistakes with Indifference Curves

Figure A.3 Consumer Decision Making with Indifference Curves

B

A

E

D

2. but point D--on a higher indifference curve--is preferred.

3. At Max's best possible point, the budget line and indifference curve are tangent.

1 2 3 4 5

6

9

12

15

3

Number of Concerts per Month

Number of Movies per Month

1. Points B and E are affordable.

Figure A.4 An Increase in Income

D

6

H

3

H'

H''1. When Max's income rises to

$300, his budget line shifts outward.

2. If his preferences are shown by these two indifference curves, he'll choose point H.

3. But different preferences could lead him to H'' or H'.

6

12

105

15

30

Number of Concerts per Month

Number of Movies per Month

Figure A.5 Deriving the Demand Curve

Price per Concert

J

6 7 10

D

5101520

$3025

3 51 2 4

K

(b)

D J

6 7 10

K

68

10

15

15 303 51 2 4

(a)

2. But when the price of concerts falls to $10, their condition is satisfied at point J.

3. The demand curve shows the quantity of concerts Max chooses at each price for concerts.

Number of Concerts per Month

Number of Movies per

Month

Number of Concerts per Month

1. When the price of concerts was $30,

movies

concertsconcertsmovies,

PPMRS at point D.