Chapter 3 - The theory of consumer choice. In this chapter students will be able to: Develop an approach for analyzing consumer preferences, explain how a consumer’s income and the prices that must be paid for various goods limit consumption choices, determine how changes in income affect consumption choices. | MICROECONOMICS: Theory & Applications By Edgar K. Browning & Mark A. Zupan John Wiley & Sons, Inc. 12th Edition, Copyright 2015 Chapter 3: The Theory of Consumer Choice Prepared by Dr. Della Lee Sue, Marist College Learning Objectives Develop an approach for analyzing consumer preferences. Explain how a consumer’s income and the prices that must be paid for various goods limit consumption choices. Describe how the market basket chosen by a consumer reflects both the consumer’s preferences and the budget constraints imposed on the consumer by income and the prices that must be paid for various goods. Determine how changes in income affect consumption choices. (continued) Learning Objectives (continued) Explain how altruism can be explained by the theory of consumer choice. Relate the utility approach to the indifference curve method of analyzing consumer choice. Explain the mathematics behind consumer choice. CONSUMER PREFERENCES Develop an approach for analyzing consumer . | MICROECONOMICS: Theory & Applications By Edgar K. Browning & Mark A. Zupan John Wiley & Sons, Inc. 12th Edition, Copyright 2015 Chapter 3: The Theory of Consumer Choice Prepared by Dr. Della Lee Sue, Marist College Learning Objectives Develop an approach for analyzing consumer preferences. Explain how a consumer’s income and the prices that must be paid for various goods limit consumption choices. Describe how the market basket chosen by a consumer reflects both the consumer’s preferences and the budget constraints imposed on the consumer by income and the prices that must be paid for various goods. Determine how changes in income affect consumption choices. (continued) Learning Objectives (continued) Explain how altruism can be explained by the theory of consumer choice. Relate the utility approach to the indifference curve method of analyzing consumer choice. Explain the mathematics behind consumer choice. CONSUMER PREFERENCES Develop an approach for analyzing consumer preferences. Consumer Preferences Economists make three assumptions about the typical consumer’s preferences: Preferences are complete. Preferences are transitive. More of any good is preferred to less. aka “nonsatiation” Definitions Indifferent – when a consumer finds two options to be equally satisfactory Market baskets – combinations of goods Economic “bads” – commodities of which less is preferred to more over all possible ranges of consumption Economics “goods” – commodities of which more is better than less Figure – An Indifference Curve Indifference curve – a plot of all the market baskets the consumer views as being equally satisfactory Figure - An Indifference Map Characteristics of Indifference Curves Characteristics: An indifference curve has a downward slope if both goods are desirable. An indifference curve that lies farther from the origin is preferred to one that is closer to the origin. Two indifference curves cannot intersect. An indifference
