Consumer Theory 1

Consumer Theory 1 - Economics 21 Intermediate...

Info iconThis preview shows pages 1–12. Sign up to view the full content.

View Full Document Right Arrow Icon
Economics 21 Intermediate Microeconomics Topic 2: Consumer Theory (i)
Background image of page 1

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

View Full DocumentRight Arrow Icon
I. Introduction We have seen how demand curves may be used to represent consumer behaviour. But we said very little about the nature of the demand curve; why it slopes down for example. Now we go ‘behind’ the demand curve i.e. we investigate how buyers reconcile what they want with what they can get
Background image of page 2
I. Introduction N.B. We can use this theory in many ways - not simply as household consumer buying goods. For example: Modelling decision of worker as regards his supply of labour (i.e. demand for leisure) Allocation of income across time (saving and investment)
Background image of page 3

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

View Full DocumentRight Arrow Icon
II. Theory of Consumer Choice Four elements: (i) Consumer’s income (ii) Prices of goods (iii) Consumer’s tastes (iv) Rational Maximisation
Background image of page 4
III. The Budget Constraint The first two elements define the budget constraint The feasibility of the consumer’s desired consumption bundle depends upon two factors: (i) Income (ii) Prices Note: We assume, for the time being, that both are exogenous (i.e. beyond consumer's control)
Background image of page 5

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

View Full DocumentRight Arrow Icon
III. The Budget Constraint Example (N.B two goods) Two goods - films and meals Student grant = $50 per week (p.w.) Price of meal = $5 Price of film = $10
Background image of page 6
III. The Budget Constraint Thus student can ‘consume’ maximum p.w. of 10 meals or 5 films by devoting all of his grant to the consumption of only one of these goods. Alternatively, he can consume some combination of the two goods For example, giving up one film a week (saving $10) enables student to buy two additional meals (costing $5 each) .
Background image of page 7

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

View Full DocumentRight Arrow Icon
III. The Budget Constraint q m $5* q m q f $10* q f M 0 0 5 50 50 2 10 4 40 50 4 20 3 30 50 6 30 2 20 50 8 40 1 10 50 10 50 0 0 50 Table 1: Affordable Consumption Bundles
Background image of page 8
Films 0 Meals A B Figure 1: Budget Constraint 2 8 10 1 4 5
Background image of page 9

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

View Full DocumentRight Arrow Icon
Films 0 Meals Figure 1: Budget Constraint Budget (Feasible) Set
Background image of page 10
III. The Budget Constraint The budget constraint defines the maximum affordable quantity of one good available to the consumer given the quantity of the other good that is being consumed.
Background image of page 11

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

View Full DocumentRight Arrow Icon
Image of page 12
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 61

Consumer Theory 1 - Economics 21 Intermediate...

This preview shows document pages 1 - 12. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online