1. Economics 111.3 Winter 14 February 12 th, 2014 Lecture 14 Ch. 8 Consumer’s Choice Concept of Utility The Theory of Demand

2. Test 2 Friday, February 14 th, 2014 8:30 – 9:20 Room 200 STM Chapters to be tested: 4, 5 (pp. 108-115), 6 (up to p. 138), 8 Format: Multiple-Choice Questions (MCQ): 30 questions – 100% of Test mark Time – 50 minutes

4. IC cones

7. When two products are SUBSTITUTES, price of one & demand for the other move in the same direction

8. Study question

11. THE BUDGET CONSTRAINT, or Budget Line budget constraintThe budget constraint shows –various combinations of goods the consumer can afford –given his or her income and the prices of the two goods. budget constraintlineAny point on the budget constraint line indicates the consumer’s combination or tradeoff between two goods.

12. The Budget Line We use the following symbols: P A = price of good A, P B = price of good B, Q A = quantity of good A, Q B = quantity of good B, y (or M or I) = income. The budget line can be written as: P A Q A + P B Q B = y or, $4.00 Q A + $8 Q B = $40 We can choose any combination of goods that satisfies this equation. Good “A” Good “B”

13. Attainable Quantity of A Quantity of B 1210 8 6 4 2 0 2 4 6 8 10 12 Unattainable The Budget Line Units of A (p=$1.50) Units of B (p=$1.00) Total expenditure 80$12 63 46 29 012$12

14. Increase in Income

16. The slope of Budget Line

17. Good “B” Good “A”

18. Quantity of A Quantity of B 1210 8 6 4 2 0 2 4 6 8 10 12 The Budget Line Price changes cause a change in the quantity demanded of the items Price changes cause a change in the quantity demanded of the items Price of A rises

19. Quantity of A Quantity of B 1210 8 6 4 2 0 2 4 6 8 10 12 An increase in income makes the purchase of more of either or both items possible An increase in income makes the purchase of more of either or both items possible Income increases

20. Study question

21. Consumer’s Choice: Ordinal Utility: Indifference Curve Analysis

22. Indifference Curves An indifference curve represents all the combinations of the two goods amongst which an individual is indifferent. indifference curve An indifference curve shows consumption bundles that give the consumer the same level of satisfaction. Marginal utility theory assumes utility is numerically measurable Indifference curve approach requires only that a consumer specify if a particular combination of products yields more or less utility than another

23. NB! more of a good is better than less of it good: commodity for which more is preferred to less at least at some levels of consumption bad: something for which less is preferred to more, such as pollution consumers are not satiated