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OU ECON 1123 - Economics Dependent on the Consumer

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ECON 1123 1st Edition Lecture 6Outline From Previous Lecture (Lecture 5)I. Changes in Demand or Supply: The General CasesII. Total revenue (TR) and Total expenditure (TE)III. The concept of elasticityA. Price Elasticity of Demand (Ed)1.Three Possibilities2. Relationship between Ed3. Determinants of EdOutline Lecture 6I. Consumer Choice: The Essence of the ProblemII. Subjective Consumer Preferences: Indifference SetsIII. Objective Consumer Circumstances: The Budget ConstraintLecture 6 NotesI. Consumer Choice: The Essence of the ProblemIn 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 preferencesII. Subjective Consumer Preferences: Indifference SetsCorollary- 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 nutsCombo B: 12 Apples, 4 nutsCombo C: 10 Apples, 5 nutsThese 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 nutsCombo 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 ofa 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 satisfactionIII. Objective Consumer Circumstances: The Budget ConstraintWe 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 consumedSuppose the consumer has weekly disposable income of $5001 unit of food is $1001 unit of clothing is $25If 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


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