Household as a consumer

decisions

Questions

Explanation of the demand curve Why is PQ relationship inverse? Can it become positive? If so when?

The economic process

The best that the consumer can afford. best: in terms of-------preference. Afford: in terms of-------budget. Budget constraint : one good and the rest, or one good and another good with a fixed amount to spend.

The process

Matching Preferences to opportunities. So we require ---Preference set and Opportunity set.

If there is one commodity and an income constraint, how would one decide how much to consume? Two questions: - how much can I afford? - what is my preference? To help arrive at the best

Preference expressed through utility.

Consumer is rational and so wants to maximize utility.

Utility

Measurement issues?

Measurement

Cardinal

ordinal

Axioms

Completeness- any two bundles can be compared. Transitivity More is preferred to less.

Law

Law of diminishing Marginal utility Measured cardinally?

Optimizing rule

When there is no income constraint and no price to pay: Maximize Total utility When there is one commodity, an income constraint and price MU = P When there is more than one commodity , each with a different price and an income constraint: Equimarginal principle

Getting to the demand curve

Using the Equimarginal Principle: MUx / Px = MUy / Py= ..= MU per Re of income. What happens if Px rises? The inverse Price-Quantity relationshipDemand curve

The ordinal school

Challenges the cardinal school Considers baskets Derives a preference set based on Ordinal measurement- How? INDIFFERENCE CURVE depicting well behaved preferences. ( more is preferred to less)

Getting an Indifference curve

Derive combinations of the two goods which yield a particular level of satisfaction / utility. How does it look?

Properties of Indifference curves

Downward sloping to keep the level of utility constant more is preferred; more takes one to a higher Ind curve. Convex to the origin Non intersecting

Slope of the indifference curves

Marginal rate of substitution If decreasing- what is the shape? If increasing ? If constant?

Any other?

A decreasing MRS is the kind of ind curve that we are concerned with. 14 4 10 5 8 6 6 8 5 12

Movement along an ind curve should satisfy: MUx x + MUy y = 0 MRS = y / x = - MUx / MUy is the slope of the indifference curve. We ignore the negative sign!

Map of Indifference curves

Captures the preference set.

The Budget line- Opportunity set Slope of the budget line?

The opportunity set

The Budget Equation: P1x1+ P2x2 less than or equal to m. Vertical Intercept : m / P1 (rise) Horizontal intercept: m / P2 (run) Rise / run = - P2/P1

Optimal choice

The highest indifference curve that the consumer can get to with the budget constraint. Point of tangency Feature of this point of tangency.

The data that this point of optimal choice gives?

Change in slope of the budget line

To get the optimal choice at another price

Derive the demand from these two points of optimal choice?

Price consumption curve or Price offer curve

Set of optimal choice combinations for different prices of X . Slope of this PCC. Northeasterly? Northwesterly? How does the demand curve look for each of the PCCs?

Demand curve from PCC curve

Northeasterly sloped PCC Demand Downward sloping

Northwesterly sloped PCC Demand curve for X is upward sloping. We need to see how this happens and why this happens