110Ch07 - Chapter 7: Utility & Demand Objectives...

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Explain what limits a household’s consumption choices Describe preferences using the concept of utility and distinguish between total utility and marginal utility Explain the marginal utility theory of consumer choice Explain the paradox of value
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Household Consumption Choices A household’s consumption choices are determined by: Consumption possibilities Preferences Consumption Possibilities A household’s consumption possibilities are constrained by its budget and the prices of the goods and services it buys. A budget line describes the limits to a household’s consumption choices.
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A Budget Line The household can afford all the points on or below the budget line. The household cannot afford the points beyond the budget line.
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The Household’s Budget Relative Price A relative price is the price of one good divided by the price of another good. The price of a movie is $6 and the price of soda is $3 a six-pack. So the relative price of a movie is $6 per movie divided by $3 per six-pack, which equals 2 six-packs per movie.
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The Household’s Budget A Price Change A change in the price of the good on the x -axis changes the affordable quantity of that good and changes the slope of the budget line. Figure 7.2(a) shows the rotation of a budget line after a change in the relative price of movies.
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The Household’s Budget Real Income A household’s real income
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110Ch07 - Chapter 7: Utility & Demand Objectives...

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