Principles of Economics- Mankiw (5th) 474

Principles of Economics- Mankiw (5th) 474 - 488 PA R T S E...

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488 PART SEVEN ADVANCED TOPIC through the explicit optimization envisioned in the theory. Yet consumers are aware that their choices are constrained by their financial resources. And, given those constraints, they do the best they can to achieve the highest level of satisfac- tion. The theory of consumer choice tries to describe this implicit, psychological process in a way that permits explicit, economic analysis. The proof of the pudding is in the eating. And the test of a theory is in its ap- plications. In the last section of this chapter we applied the theory of consumer choice to four practical issues about the economy. If you take more advanced courses in economics, you will see that this theory provides the framework for much additional analysis. ± A consumer’s budget constraint shows the possible combinations of different goods he can buy given his income and the prices of the goods. The slope of the budget constraint equals the relative price of the goods. ± The consumer’s indifference curves represent his
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