ECON 1123 1st Edition Lecture 6 Outline From Previous Lecture Lecture 5 I Changes in Demand or Supply The General Cases II Total revenue TR and Total expenditure TE III The concept of elasticity A Price Elasticity of Demand Ed 1 Three Possibilities 2 Relationship between Ed 3 Determinants of Ed Outline Lecture 6 I Consumer Choice The Essence of the Problem II Subjective Consumer Preferences Indifference Sets III Objective Consumer Circumstances The Budget Constraint Lecture 6 Notes I Consumer Choice The Essence of the Problem In a general sense a person will have unlimited material desires versus limited economic resources Individually there will be subjective desires how much do I value this good versus objective circumstances how much can I afford to pay for the good Note how do we measure subjective desires First we must assume that individuals can rank in order their preferences II Subjective Consumer Preferences Indifference Sets Corollary consumers recognize some combinations of goods as equally satisfying The consumer is said to be indifferent among such combinations Example You could have these combinations Combo A 16 Apples 3 nuts Combo B 12 Apples 4 nuts Combo C 10 Apples 5 nuts These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Combo D 8 Apples 7 nuts Combo E 6 Apples 9 nuts Each of these combos will give you the same level of satisfaction so you are indifferent This illustrates the concept of diminishing marginal utility Increasing consumption of a good results in smaller and smaller additions to total utility satisfaction Corollary conversely as additional units of a good are given up larger and larger amounts of utility are sacrificed This creates an indifference curve The Indifference curve shows all combinations of goods yielding equal levels of satisfaction The indifference curve will be convex which reflects the principle of diminishing marginal utility An Indifference curve further from the origin on a graph shows higher levels of satisfaction Note The rate at which an individual is willing to trade one good for another to maintain a given level of satisfaction III Objective Consumer Circumstances The Budget Constraint We want the highest level of material satisfaction that we can possibly attain But which of the infinite levels of satisfaction will we actually attain It depends on the consumers objective circumstances the individual s income prices of the goods consumed Suppose the consumer has weekly disposable income of 500 1 unit of food is 100 1 unit of clothing is 25 If the entire income is spent on food then 5 units of food could be purchased each week If the entire income is spent on clothing then 20 units of clothing could be purchased each week This is modeled on a budget constraint graph that will be linear You go up and down on the line to see different combinations of how many food or clothing units you could purchase with your weekly income