Chapter3 - AGEC 105 Chapter 3 Theory of Consumer Behavior...

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Chapter 3 Theory of Consumer Behavior AGEC 105
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2 Introduction Introduction IMPORTANT DATES Quiz on Friday, September 10. CLASS WEB SITE CHAPTER 3 Theory of Consumer Behavior Examples
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3 Topics of Discussion THE BUDGET CONTSTRAINT UTILITY THEORY Total Utility Marginal Utility Law of Diminishing Marginal Utility INDIFFERENCE CURVE Concept of Isoutility Marginal Rate of Substitution
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4 Consumer Choice You are constantly making economic decisions At the highest level of generality, we are all very much alike Come up against the same constraints Too little income or wealth Too little time to enjoy it all The theory of individual decision making is called “consumer theory”
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5 The Budget Constraint Virtually all individuals must face two facts of economic life Have to pay prices for the goods and services they buy Have limited funds to spend A consumer’s budget constraint identifies which combinations of goods and services the consumer can afford with a limited budget Budget line is the graphical representation of a budget constraint The price of one good relative to the price of another The slope of the budget line indicates the spending trade-off between one good and another Amount of one good, that must be sacrificed in order to buy more of another good If P Y is the price of the good on the vertical axis, then the slope of the budget line is –P X / P Y
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6 The Budget Constraint Max's Consumption Possibilities with Income of $150 Concerts at $30 each Movies at $10 each Q Total Exp. on Concert Q Total Exp. on Concert A 0 $0 15 150 B 1 $30 12 120 C 2 $60 9 90 D 3 $90 6 60 E 4 $120 3 30 F 5 $150 0 0
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7 Changes in the Budget Line Changes in income Increase in income will shift the budget line upward (and rightward) A decrease in income will shift the budget line downward (and leftward) Shifts are parallel Changes in income do not affect the budget line’s slope Changes in price In each case, one of the budget line’s intercepts will change, as well as its slope When the price of a good changes, the budget line rotates Both its slope and one of its intercepts will change
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