Consumer

1 Choice
How do people
decide what to buy?

DAMIEN KING
University of the West Indies, Jamaica
Why does the demand curve
?
slope downward?
Think of your favourite dish. Why
?
do you not have it more often?

2
 We apply the general

!
approach to decision-
making (from ECON1000)
to the problem of
consumer choice.

3
Can you
predict Mitsubushi
Lancer
what kind BMW
M6

of car your
friend will Lexus
LX

buy?
Toyota
Rav4

Suzuki
Honda Vitara
Civic

4
 PREFERENCE
Performance Utility Mitsubushi
Lancer
BMW
M6
BUDGET
$ 5m
Lexus
LX

$ 8mRav4
Toyota

Suzuki
Honda Vitara
$ 22m Civic

5
 PREFERENCE
Performance Utility Mitsubushi
Lancer
BMW
M6
BUDGET
$ 5m
Lexus
LX

$ 8mRav4
Toyota

Suzuki
Honda Vitara
$ 22m Civic

6
 The Budget
Outline 1What you can afford

Preferences
2What you like

Optimizing
3Selecting the best choice

4Income and Substitution Effects

7
The Budget
What can you afford?

8
 Weekly income = $1,000
Budget
Price of fruit = $200
Informat
ion Price of a patty = $100

9
 10

100
100
100
100
100
100
The Feasible Set

100
100
100
100
100
100
100
100
100
100
100
100
100
100
 =
All the
combinati
ons of
patties
and fruit
that can
be
afforded
11
8
7

1
0
0 1 2 3 4 5 6 7 8 9 10

12
8
7

6 Not
Budget
Affordable
5 Constraint
4

2 Affordable

1
0
0 1 2 3 4 5 6 7 8 9 10

13
8
7
Suppo
6 se
5 incom
to
e $1,200
rises
4

1
0
0 1 2 3 4 5 6 7 8 9 10

14
8
7

6 A change
5 in income
4 shifts
3 the
2 budget
1 line
0
0 1 2 3 4 5 6 7 8 9 10

15
8
7 The further
away from
6 the origin, the A change
5 more you
can afford.
in income
4 shifts
3 the
2 budget
1 line
0
0 1 2 3 4 5 6 7 8 9 10

16
8
7 Suppos
6 ea
5 price
Patty
increas
4 nowes
costs
3 $200
2

1
0
0 1 2 3 4 5 6 7 8 9 10

17
8
7

6
A change in
5
price
4
changes the
slope and
3
position the
2
budget line
1
0
0 1 2 3 4 5 6 7 8 9 10

18
 8
7

6
= $100 = Market
5

4
Price of

3 a Patty
2 (in
1
0
fruit)
0 1 2 3 4 5 6 7 8 9 10

19
8
7 The real cost of
6 the horizontal
good equals the
Market
5

4
slope of the line. Price of
3 a Patty

2 (in
1
0
fruit)
0 1 2 3 4 5 6 7 8 9 10

20
8
7 If patties become
6 more expensive,
the slope gets
Market
5

4
steeper. Price of
3 a Patty
2 (in
1
1
0
fruit)
0 1 2 3 4 5 6 7 8 9 10

21
 Amount of purchasing power you
Budget Yhave
Distance of the line from the origin
line Rate at which you can trade off
provides PThe slope of the line

the
following
informatio
n

22
Preferences
What you like.

23
8
7

6 What is
5
your order
of
4
preference
3
for all
2 possible
1 combinatio
0 ns?
0 1 2 3 4 5 6 7 8 9 10

24
8
7

6 What is
5
your order
of
4
preference
3
for all
2 possible
1 combinatio
0 ns?
0 1 2 3 4 5 6 7 8 9 10

25
Indifference Curve
A curve linking all the
combinations of two
commodities that a
consumer regards as
providing equal
satisfaction

26
8
7

6 Indiffere
5 nce Map
4

1
0
0 1 2 3 4 5 6 7 8 9 10

27
8
7

6 Higher
5 Indifferen
4 ce Curves
3 are
2 preferred
1
0
0 1 2 3 4 5 6 7 8 9 10

28
8 Marginal Rate
7
of
Substitution
6

5
2 =
4
How much
1
3

2
=
you would
exchange one
1
good for
0
0 1 2 3 4 5 6 7 8 9 10
=
another to be
no worse off.
29
 An
indiffere
nce map
This is
person particula
likes
patties r to each
person
30
 An
indiffere
nce map
This is
person particula
prefers
fruit r to each
person
31
8
7

6 Convex

1
4

1
0
0 1 2 3 4 5 6 7 8 9 10

32
8

6 Downwa
5 rd

2
4
sloping
3

1
0
0 1 2 3 4 5 6 7 8 9 10

33

Non-
intersect

3
5 A ing
3 B
2 C

4 67
34
Optimizing
Selecting the best choice.

35
 We know what

?
you can afford.
We know what
you like. So how
Do
dothe
youbestdecide
you can.
36
The
Best
Choice

37
 The
Best
Choice
3
2
1

681
0 38
 The
Best
5 Choice

4
39
 TWO
REASONS
WHY THE
ARREST OF
DRUG
KINGPINS
DOESNT
DISRUPT THE
DRUG TRADE

40
Why dont
I have
curried
lobster for
every 41
 Housing

Cant afford both

Mona lobster and Mona
house house

Card-
board
box
Food
box
lobster
lunch 42
Why is a
gift basket
a waste of
money?

43
 Gift
Basket
4 B

Best use
3 C of cash

2 4
44
Income and
Substitution
Effects
When things Change

45
 If taxi fares go up,

?
will you spend
more or less
money eating
out?
46
 A
Change
7
6 in
Income

45
47
 Income Effect
The effect of a change
in purchasing power
(alone) on the quantities
of commodities
The income effect is consumed
usually positive

48
500
Income
400
Effect:
300 Positive
200

100
49
500
Income
400
Effect:
300 Positive
200

100
50
Income
Effect:
Positive
,
Usually

51
 Income
Effect:
Inferior
Positive
good ,
sometimes
Usually
negative

52
 Normal v Inferior
Good
Whereas for a normal
good, an increase in
income causes
quantity consumed to
Sincerise,
the income
for aneffect is usually
inferior
positive, ignore inferior goods for now
good, consumption will
53
8
7

6 A Change
5 in
4 2 Relative
3
1
Price
2
(patties
1
dearer)
0
0 1 2 3 4 5 6 7 8 9 10

57
8
7

6 A Change
5 in
4 Relative
3
1
Price
2
2 (patties
1
dearer)
0
0 1 2 3 4 5 6 7 8 9 10

58
A Change
in
Relative
Price
(patties
dearer)

59
A Change
in
Relative
Price
(patties
dearer)

60
 A Change
in
B
Relative
Price
A (patties
dearer)

61
 Substitution
Effect
The effect of a change
in relative price (alone)
on the quantities of
The substitution effect is always negative
commodities
consumed
62
Substitut
ion
Effect:
Negative
, always

64
 65
Substitut
Income

Effects
ion
&

t
ec
eff
n
io
ut
tit e t
bs c om ec
Su In e
ff
 A Rise in
the Price
of
A
Patties

66
 Two changes at
once:
1. Patties dearer /
fruit
cheaper
substitution
effect
Subst

B
2. Consumer
A poorerincome effect
Incom
e

This is why the

Incom
demand curve is
e
Subst downward-sloping
67
 If taxi fares rise, will people
Applicatio ?
spend more eating out?
If tuition increases, how will your
ns of
Income ?
spending on entertainment
change?

and
Substituti
on Effects

68
Suppose studying
gets easier, do
you study more or
take more time
off?
69
Leisure (in hours)
An
Applicati
on to
Studying

Studying (in pages)

70
Leisure (in hours)
Leisure Studying
10 0
9 3
3 pages 8 6
per 7 9
hour
6 12
5 15
4 18
3 21
2 24
1 27
0 30

Studying (in pages)

71
Leisure (in hours)
Leisure Studying
10 0
9 4
4 pages 8 8
per 7 12
hour
6 16
5 20
4 24
3 28
2 32
1 36
0 40

Studying (in pages)

72
 e Leisure (in hours)
Income
&
Substitut
Incom

B
A
ion
Subst

Effects:
Studying
Incom
Studying (in pages)
Subst
e

73
 e Leisure (in hours)
Income
&
Substitut
Incom

A
ion
Subst

Effects:
Studying
Incom
Studying (in pages)
Subst
e

74
 Where are Rent: almost all
income income effect.
and Large, unavoidable share
substitutio
n effects KFC: almost all
applicable? substitution effect.
Small, easily substitutable
share

75
Choices reflect two
1
considerations: what you like and
what you can to
The response afford.
any change can
2
be broken down into income and
substitution effects.

82