After completing this chapter, students will be able to: See how a budget constraint represents the choices a consumer can afford, learn how indifference curves can be used to represent a consumer’s preferences, analyze how a consumer’s optimal choices are determined,. | 7 TOPICS FOR FURTHER STUDY 21 The Theory of Consumer Choice The theory of consumer choice addresses the following questions: Do all demand curves slope downward? How do wages affect labor supply? How do interest rates affect household saving? THE BUDGET CONSTRAINT: WHAT THE CONSUMER CAN AFFORD The budget constraint depicts the limit on the consumption “bundles” that a consumer can afford. People consume less than they desire because their spending is constrained, or limited, by their income. THE BUDGET CONSTRAINT: WHAT THE CONSUMER CAN AFFORD The budget constraint shows the various combinations of goods the consumer can afford given his or her income and the prices of the two goods. The Consumer’s Budget Constraint THE BUDGET CONSTRAINT: WHAT THE CONSUMER CAN AFFORD The Consumer’s Budget Constraint Any point on the budget constraint line indicates the consumer’s combination or tradeoff between two goods. For example, if the consumer buys no pizzas, he can afford 500 pints of Pepsi . | 7 TOPICS FOR FURTHER STUDY 21 The Theory of Consumer Choice The theory of consumer choice addresses the following questions: Do all demand curves slope downward? How do wages affect labor supply? How do interest rates affect household saving? THE BUDGET CONSTRAINT: WHAT THE CONSUMER CAN AFFORD The budget constraint depicts the limit on the consumption “bundles” that a consumer can afford. People consume less than they desire because their spending is constrained, or limited, by their income. THE BUDGET CONSTRAINT: WHAT THE CONSUMER CAN AFFORD The budget constraint shows the various combinations of goods the consumer can afford given his or her income and the prices of the two goods. The Consumer’s Budget Constraint THE BUDGET CONSTRAINT: WHAT THE CONSUMER CAN AFFORD The Consumer’s Budget Constraint Any point on the budget constraint line indicates the consumer’s combination or tradeoff between two goods. For example, if the consumer buys no pizzas, he can afford 500 pints of Pepsi (point B). If he buys no Pepsi, he can afford 100 pizzas (point A). Figure 1 The Consumer’s Budget Constraint Quantity of Pizza Quantity of Pepsi 0 Consumer’s budget constraint 500 B 100 A Copyright©2004 South-Western THE BUDGET CONSTRAINT: WHAT THE CONSUMER CAN AFFORD The Consumer’s Budget Constraint Alternately, the consumer can buy 50 pizzas and 250 pints of Pepsi. Figure 1 The Consumer’s Budget Constraint Quantity of Pizza Quantity of Pepsi 0 Consumer’s budget constraint 500 B 250 50 C 100 A Copyright©2004 South-Western THE BUDGET CONSTRAINT: WHAT THE CONSUMER CAN AFFORD The slope of the budget constraint line equals the relative price of the two goods, that is, the price of one good compared to the price of the other. It measures the rate at which the consumer can trade one good for the other. PREFERENCES: WHAT THE CONSUMER WANTS A consumer’s preference among consumption bundles may be illustrated with indifference curves. Representing Preferences with Indifference Curves An .
