Microeconomics3e-Ch06

Chapter 6: Consumer Choices

6.1: Consumption Choices

• Budget Constraint:

  • Represents the possible combinations of two goods affordable for a consumer given their limited income.

• Total Utility:

  • The overall satisfaction derived from consumption choices.

6.2: How Changes in Income and Prices Affect Consumption Choices

• Marginal Utility:

  • The additional satisfaction from consuming one more unit of a good.

• Diminishing Marginal Utility:

  • The principle that each additional unit consumed provides less extra satisfaction than the previous one.

Practical Example of Consumption Choices

• José's Budget:

  • Given an income of $56:

    • Movies: $7 each

    • T-shirts: $14 each

• The budget constraint shows all combinations of movies and T-shirts he can afford.

Rule for Maximizing Utility

• Marginal Utility per Dollar:

  • Measure of additional satisfaction from purchasing a good relative to its price.

  • Optimal consumption occurs when the additional utility per dollar spent is equal for all goods considered.

6.2 Changes in Income and Prices

• Factors influencing consumer choice:

  • Income levels, prices, and personal preferences.

• When income increases, the budget constraint shifts, affecting consumption choices of goods which can be classified as normal or inferior.

Example: Income Changes Impact

• Concert Tickets vs. Overnight Getaway:

  • Original budget constraint choice (point M) and new choices on the adjusted constraint indicated by points N, P, or Q depending on the nature of the goods (normal vs. inferior).

Example: Price Changes Impact

• Budget Constraint Rotation:

  • When the price of a good (e.g., bats) increases, the budget constraint rotates inward.

  • Choices may involve consuming less of one good or both goods.

Response to Higher Prices

• Substitution Effect:

  • Consumes less of the good with a higher price and more of the relatively lower-priced good.

• Income Effect:

  • A price increase effectively reduces the consumer's purchasing power, further influencing their consumption behavior.

Foundations of Demand Curves

• A rotation of the budget constraint reflects the changing quantity demanded by consumers seeking maximum utility.

• Illustrates the correlation between price changes and quantity demanded in demand curves.

Example: Housing Market

• Changes in housing price lead to fluctuations in consumer choices:

  • As prices rise, demand generally decreases.

6.3: Behavioral Economics Overview

• Traditional economic models:

  • Assume rationality in decision-making, complete self-control, and fungibility.

• Behavioral Economics:

  • Integrates insights from psychology to understand economic decisions.

  • Analyzes how subjective values of money can influence consumer behavior.

Discussion Question: Value of Education during Recession

• Opportunity cost consideration:

  • Unemployment lowers the cost of time invested in education.

  • Data relationships between education levels, unemployment rates, and income potential.

The Impact of Education on Earnings and Unemployment Rates (2012)

• Positive correlation identified between education and earnings.

• Higher degrees linked to lower unemployment rates compared to those with minimal formal education.

• Relevant statistics:

  • National median weekly income: $815

  • National unemployment average: 6.8% (as of May 22, 2013)