Chapter 2

Chapter 2 - Chapter 2 A Consumer’s Economic Circumstances...

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Unformatted text preview: Chapter 2 A Consumer’s Economic Circumstances In this chapter, we will begin to formalize what we mean when we say that people make the best choices they can given their circumstances. 1 The logical first step is to find ways of describing how our individual circumstances place limits on the kinds of choices that are available to us. Economists refer to these limits as constraints , and we refer to all the options we can choose from – given our constraints – as our choice set. Most of us would love, for instance, to go on many exotic vacations, to work only when we feel like it, to retire early and to forget about constantly worrying about the future. But it is simply not possible to do everything we want because our limited resources place constraints on our choice sets. So, we have to determine what kinds of choices are actually possible for us given who we are, and only once we know what choices are possible can we decide which of these choices is best. This chapter introduces ways of characterizing what choices are possible in our roles as consumers, and Chapter 3 uses the tools introduced here to clarify the choice sets we face as workers and as people who plan for the future by saving or borrowing. We will begin by focusing entirely on the underlying economic concepts that are relevant for thinking about the individual circumstances faced by consumers. In the process, we will notice that there are some limits to how easily we can model individual circumstances using only words and graphs — and part B of the chapter will then proceed to demonstrate how economists are using the language of mathematics to generalize intuitions that emerge in the more intuitive and graphical exposition of the material in part A of the chapter. This, as was mentioned in Chapter 1, will characterize many of the chapters throughout this text — a pure focus on economics followed by an exposition of the mathematics that helps economists say more about the world than we otherwise could. 2A Consumer Choice Sets and Budget Constraints Consumers constantly make decisions about how much to consume of different goods. They are constrained not only by what financial resources they command but also by the prices that they face when they make their choices. Typically they have little control over these prices since most 1 No prior chapter required as background. No calculus required for part B. 32 Chapter 2. A Consumer’s Economic Circumstances consumers are individually “small” relative to the market and therefore have no power to influence the prices that are charged within the marketplace. It would, for instance, not even occur to most of us to try to haggle about the price of a gallon of milk at the checkout counter of our local supermarket. We will therefore assume for now that consumers are price takers — economic agents that cannot influence the prices in the economy. And while our decisions as workers and investors determine how much money we will have to devote to consumption decisions, we will begin our...
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This note was uploaded on 05/13/2010 for the course ECON 105D taught by Professor Cur during the Fall '09 term at Duke.

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Chapter 2 - Chapter 2 A Consumer’s Economic Circumstances...

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