{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Econ 4010 Lecture 2

Econ 4010 Lecture 2 - 3 Consumer Behavior...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
<Lecture 2> 3. Consumer Behavior: Maximizing Utility Two components in consumer behaviour: Preferences (indifference curve) & Constraints (budget line) Indifference curves represent the "willingness" aspect of consumer demand, while the budget line captures the "ability". Budget Line A budget line illustrates all the possible combinations of goods that can be purchased at given prices and for a given consumer budget. The amount of a good that a consumer can afford will depend on the consumer's income and the price of the goods. Consumer's Income: I = $80 Price of Food: P F = $1 Price of Clothing: P C = $2 Budget line: P F F + P C C = I => F + 2C = 80 It can be re-written: C = -[P F /P C ]F + I/P C => C = -(1/2)F + 40: Slope is -1/2 The slope of the budget line is the negative of the relative price of two goods. (the ratio of the prices) Let's think about how the change in the determinants will affect the budget line. A change in consumer income causes the budget line to shift parallel to the original line. i) An increase in consumer income ($80 => $160) If consumer income increases then the consumer will be able to purchase higher combinations of goods. Hence an increase in consumer income will result in an outward shift in the budget line. F + 2C = 80 => F + 2C = 160 ii) A decrease in consumer income ($80 => $40) If consumer income fell then the potential combinations of the two goods that can be purchased also fell. There would be a corresponding parallel shift to the left to represent a decrease in the potential combinations of the two goods that can be purchased. F + 2C = 80 => F + 2C = 40 1
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
If income is held constant, and the price of one of the goods changes then the slope of the curve will change. In other words, the curve will pivot. i) A decrease of price of food ($1 => $1/2) The reduction of the price of food from $1 to 50 cents means that on a fixed budget of $80, the consumer could purchase a maximum of 160 units, as opposed to 80. Note that the price of clothing has remained fixed, hence the maximum point for clothing will remain fixed. Because the price of food falls with respect to clothing, if one gives up a unit of clothing, one can now get more of food than before. Therefore the slope is now flatter. F + 2C = 80 => (1/2)F + 2C = 80 ii) An increase in price of food ($1 => $2) The budget line would be steeper than the original budget line, reflecting the rise of the price of food from $1 to $2.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern