chapter 21 - Chapter Introduction The Theory of Consumer...

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Chapter Introduction The Theory of Consumer Choice When you walk into a store, you are confronted with thousands of goods that you might buy. Because your financial resources are limited, however, you cannot buy everything that you want. You therefore consider the prices of the various goods offered for sale and buy a bundle of goods that, given your resources, best suits your needs and desires. In this chapter, we develop a theory that describes how consumers make decisions about what to buy. Thus far in this book, we have summarized consumers' decisions with the demand curve. As we have seen, the demand curve for a good reflects consumers' willingness to pay for it. When the price of a good rises, consumers are willing to pay for fewer units, so the quantity demanded falls. We now look more deeply at the decisions that lie behind the demand curve. The theory of consumer choice presented in this chapter provides a more complete understanding of demand, just as the theory of the competitive firm in Chapter 14 provides a more complete understanding of supply. One of the Ten Principles of Economics discussed in Chapter 1 is that people face trade-offs. The theory of consumer choice examines the trade-offs that people face in their role as consumers. When a consumer buys more of one good, he can afford less of other goods. When he spends more time enjoying leisure and less time working, he has lower income and can afford less consumption. When he spends more of his income in the present and saves less of it, he must accept a lower level of consumption in the future. The theory of consumer choice examines how consumers facing these trade-offs make decisions and how they respond to changes in their environment. After developing the basic theory of consumer choice, we apply it to three questions about household decisions. In particular, we ask: Do all demand curves slope downward? How do wages affect labor supply? How do interest rates affect household saving? At first, these questions might seem unrelated. But as we will see, we can use the theory of consumer choice to address each of them. 21-1 The Budget Constraint: What the Consumer Can Afford Most people would like to increase the quantity or quality of the goods they consume–to take longer vacations, drive fancier cars, or eat at better restaurants. People consume less than they desire because their spending is constrained, or limited, by their income. We begin our study of consumer choice by examining this link between income and spending. To keep things simple, we examine the decision facing a consumer who buys only two goods: pizza and Pepsi. Of course, real people buy thousands of different kinds of goods. Assuming there are only two goods greatly simplifies the problem without altering the basic insights about consumer choice. We first consider how the consumer's income constrains the amount he spends on pizza and Pepsi.
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chapter 21 - Chapter Introduction The Theory of Consumer...

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