Lecture 4 - THEORY OF CONSUMER BEHAVIOUR Three things are...

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THEORY OF CONSUMER BEHAVIOUR Three things are needed to determine the individual consumer choice or the optimal bundle: (1) M BUDGET----- (2) P S , P T PRICES------- (3) Indifference Curves . PREFERENCES----- These three parameters together give the individual consumer’s choice , i.e., the bundle that yields maximum satisfaction or consumer equilibrium. Preferences are represented by indifference curves . u 3 > u 1 > u 0 where u represents the level of satisfaction or utility defined by a specific indifference curve increasing in this order. That is basket or bundle 2 gives more satisfaction or utility than basket 1, and basket 1 gives more utility than bundle 0. All bundle that lie on the same indifference curve give the same utility. Graphically, D An Individual consumer’s Indifference Curves Properties of indifference Curves : 1. an indifference curve is both individual-specific and time-specific. 2. an indifference curve is downward sloping because both goods are good or desirable, then when one good
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