1. THEORY OF CONSUMER CHOICE

2. B
, Burgers c 25 f 20 e 15 a d 10 b 15 25 30 Z
, Pizzas per semester

3. Assumptions Individuals can rank their preferences
Non-satiation - people prefer more to less
Transitivity - rankings are consistent
Individuals are willing to give up successfully smaller amounts of one good in order to get additional units of other goods

4. Bundles of Pizzas and Burgers a consumer might consume
Indifference Curve
per semester c
Individuals can rank their preferences
Non-satiation - people prefer more to less
Transitivity - rankings are consistent
Individuals are willing to give up successfully smaller amounts of one good in order to get additional units of other goods 25 f 20 e 15 a d I 10 b 15 25 30 Z
, Pizzas per semester

5. Bundles of Pizzas and Burgers a consumer might consume
Preference Map B
, Burgers
per semester 30 25 15 Z
, Pizzas per semester 20 10 d I 1 2 e c f
Indifference curve on the right means greater satisfaction

6. Impossible Indifference Curves
Crossing B
, Burgers
per semester
Violation of Transitivity e b I 1 a I Z
, Pizzas per semester

7. Impossible Indifference Curves
Upward Sloping B
, Burgers
per semester b a I Z
, Pizzas per semester

8. Impossible Indifference Curves
Thick B
, Burgers
per semester
No two points can have same satisfaction level b a I Z
, Pizzas per semester

9. Properties of Indifference Curves
Indifference curves (IC) are
downward sloping
Convex to the origin
do not intersect
Higher IC reflect greater level of satisfaction

10. Slope of IC is called Marginal Rate of Substitution.
It denotes rate at which an individual is willing to trade two goods/ services
MUz * ΔZ = -(MUB * ΔB)
ΔB/ ΔZ = -(MUz /MUB)
Burgers
Pizzas

11. Budget Constraint B , Burgers per semester a 25 = M / p b 20 L ( p1 ( p
= $1, PB = $2, M
= $50) Z c 10
Opportunity set d 10 30 50 = M / p Z Z
, Pizzas per semester

12. Slope = - PZ/PB M PZQZ + PBQB QZ = M/PZ - PB/PZ*QB
BUDGET LINE
M PZQZ + PBQB
QZ = M/PZ - PB/PZ*QB
QB = M/PB - PZ/PB*QZ
Slope = - PZ/PB

13. Changes in the Budget Constraint
, Burgers
per semester
Price of Pizza Doubles 25 L 1 ( p
= $1) Z 50 Z
, Pizzas per semester

14. Changes in the Budget Constraint
, Burgers
per semester
Price of Pizza Doubles 25 L 1 ( p
= $1) Z
Loss L 2 ( p Z
= $2) 25 50 Z
, Pizzas per semester

15. Changes in the Budget Constraint
, Burgers
per semester
Income Doubles 25 L 1 ( M =
$50) 50 Z
, Pizzas per semester

16. Changes in the Budget Constraint
, Burgers
per semester
Income Doubles 50 L 3 ( M =
$100) 25
Gain L 1 ( M =
$50) 50
100 Z
, Pizzas per semester

17. Consumer Equilibrium
Consumer Equilibrium is attained when maximum satisfaction is obtained from given choices-
Utility Maximization

18. Utility Maximization Budget line B , Burgers per semester g 25 c 20 B10 d A a I 1 10 30 50 Z
, Pizzas per semester

19. Utility Maximization Budget line B , Burgers per semester g 25 c f 2010 I 3 d I 2 A a I 1 10 30 50 Z
, Pizzas per semester

20. Individual’s Demand Curve A
Deriving an
Individual’s Demand Curve
5.2
12.0 L 3 ( p b
= $4) e I B
Price-consumption curve A
58.9

21. Individual’s Demand Curve
Deriving an
Individual’s Demand Curve A
12.0
As Price of B increases from $4 to $6, consumer shifts to lower IC e
Price-consumption curve 3
5.2 e 2
4.3 I 3 I 2 L 2 ( p
= $6) L 3 ( p
= $4) b b
44.5
58.9 B

22. Individual’s Demand Curve
4.3
5.2
12.0
2.8 L 1 ( p b
= $12) 2
= $6) 3
= $4) e I B
Price-consumption curve A
26.7
44.5
58.9
Deriving an
Individual’s Demand Curve

23. Individual’s Demand Curve
(a) Indifference Curves and Budget Constraints
Deriving an
Individual’s Demand Curve A
12.0 e
Price-consumption curve 3
5.2 e 2
4.3 e I 3 1
2.8 I 2 L 1 ( p
= $12) I 1 L 2 ( p
= $6) L 3 ( p
= $4) b b b
26.7
44.5
58.9 B
(b) Demand Curve p
, $ per unit b
12.0 E 1 E
6.0 2 E
4.0 3 B
26.7
44.5
58.9

24. Individual’s Demand Curve
(a) Indifference Curves and Budget Constraints A
Deriving an
Individual’s Demand Curve
12.0 e
Price-consumption curve 3
5.2 e 2
4.3 e I 3 1
2.8 I 2 L 1 ( p
= $12) I 1 L 2 ( p
= $6) L 3 ( p
= $4) b b b
26.7
44.5
58.9 B
(b) Demand Curve p b
, $ per unit
12.0 E 1 E
6.0 2 E D
, Demand for B
4.0 3 1 B
26.7
44.5
58.9

25. CONSUMER CHOICE AND CHANGE IN DEMANDY E O X
SUBSTITUTION EFFECT

26. CONSUMER CHOICE AND CHANGE IN DEMANDY Y E O X X
SUBSTITUTION EFFECT

27. CONSUMER CHOICE AND CHANGE IN DEMAND
On the same IC, consumer shifts up & down by substituting one in place of another Y Y E O O` F X X
SUBSTITUTION EFFECT

28. INCOME EFFECT Y G N F X

29. INCOME EFFECT
Consumer shifts to higher IC Y G’ G M N F F’ X

30. Price Effect with Normal GoodsY
12.0 L 1 e 1 20 30

31. Price Effect with Normal GoodsY
12.0 L 2 L 1 e 3 e 1 e 2 I 1 I 2 20 30 75 X
Price effect