Consumer Demand The Consequences of Rational Choices by Consumers Demand Rational Choice What is a consumer s demand Demand Rational Choice What is a consumer s demand It is that consumer s RATIONAL consumption choice What is a rational choice How are rational choices made Demand Rational Choice A choice is rational when it is the most preferred of the alternatives that are currently available to the consumer Therefore the consumer must know her preferences what choices are available Consumption Bundles A consumer chooses the quantity to consume of each commodity The list of these quantities is a CONSUMPTION BUNDLE The consumer chooses between the available bundles E g 3 sandwiches 1 cookie is a consumption bundle Figure 1 Consumption Bundles Quantity of Cookies 4 2 4 3 2 3 1 1 0 0 1 2 3 4 Quantity of Sandwiches Restrictions on Choice What restricts a consumer s choices Scarce budget Scarce time Laws Suppose the consumer is restricted only by her budget constraint i e she can choose any bundle she can afford Budget Constraint What bundles are affordable The consumer has 24 Sandwiches cost 3 each Cookies cost 2 each Budget Constraint What bundles are affordable The consumer has 24 Sandwiches cost 3 each Cookies cost 2 each Spending all 24 on sandwiches buys the bundle Budget Constraint What bundles are affordable The consumer has 24 Sandwiches cost 3 each Cookies cost 2 each Spending all 24 on sandwiches buys the bundle 8 sandwiches 0 cookies Spending all 24 on cookies buys the bundle Budget Constraint What bundles are affordable The consumer has 24 Sandwiches cost 3 each Cookies cost 2 each Spending all 24 on sandwiches buys the bundle 8 sandwiches 0 cookies Spending all 24 on cookies buys the bundle 0 sandwiches 12 cookies Figure 2 Quantity of Cookies 0 12 12 10 8 6 4 2 8 0 0 0 2 4 6 8 10 12 Quantity of Sandwiches Budget Constraint What bundles are affordable The consumer has 24 Sandwiches cost 3 each Cookies cost 2 each Spending 12 on sandwiches and 12 on cookies buys the bundle Budget Constraint What bundles are affordable The consumer has 24 Sandwiches cost 3 each Cookies cost 2 each Spending 12 on sandwiches and 12 on cookies buys the bundle 4 sandwiches 6 cookies Figure 2 Quantity of Cookies 0 12 12 10 8 4 6 6 4 2 8 0 0 0 2 4 6 8 10 12 Quantity of Sandwiches Figure 2 Quantity of Cookies 0 12 12 Budget constraint 10 8 4 6 6 4 2 8 0 0 0 2 4 6 8 10 12 Quantity of Sandwiches Figure 2 Quantity of Cookies 0 12 12 Budget constraint What area contains all the bundles from which the consumer 4 6 can choose 10 8 6 4 2 8 0 0 0 2 4 6 8 10 12 Quantity of Sandwiches Figure 2 Quantity of Cookies 0 12 12 Budget constraint What area contains all the bundles from which the consumer 4 6 can choose The area on and inside the budget constraint 10 8 6 4 Budget set 2 8 0 0 0 2 4 6 8 10 12 Quantity of Sandwiches Figure 2 Quantity of Cookies 0 12 12 Budget constraint What area contains all the bundles from which the consumer 4 6 can choose The area on and inside the budget constraint What area contains the bundles the consumer cannot choose Budget set 10 8 6 4 2 8 0 0 0 2 4 6 8 10 12 Quantity of Sandwiches Figure 2 Quantity of Cookies 0 12 12 Budget constraint What area contains all the bundles from which the consumer 4 6 can choose The area on and inside the budget constraint What area contains the bundles the consumer cannot choose Budget set Everywhere outside the budget 8 0 constraint 10 8 6 4 2 0 0 2 4 6 8 10 12 Quantity of Sandwiches Budget Constraint pX per unit of X pY per unit of Y The consumer s budget is I Budget Constraint pX per unit of X pY per unit of Y The consumer s budget is I Buying qX units of X costs pXqX Budget Constraint pX per unit of X pY per unit of Y The consumer s budget is I Buying qX units of X costs pXqX Buying qY units of Y costs pYqY Budget Constraint pX per unit of X pY per unit of Y The consumer s budget is I Buying qX units of X costs pXqX Buying qY units of Y costs pYqY Total expenditure is pXqX pYqY Budget Constraint pX per unit of X pY per unit of Y The consumer s budget is I Buying qX units of X costs pXqX Buying qY units of Y costs pYqY Total expenditure is pXqX pYqY Income is I so the equation of the budget constraint is Budget Constraint pX per unit of X pY per unit of Y The consumer s budget is I Buying qX units of X costs pXqX Buying qY units of Y costs pYqY Total expenditure is pXqX pYqY Income is I so the equation of the budget constraint is pXqX pYqY I Budget Constraint pXqX pYqY I If all I are spent on X then she buys units of Y and units of X so the bundle purchased is If all I are spent on Y then she buys units of X and units of Y so the bundle purchased is Budget Constraint pXqX pYqY I If all I are spent on X then she buys 0 units of Y and I pX units of X so the bundle purchased is I pX 0 If all I are spent on Y then she buys units of X and units of Y so the bundle purchased is Budget Constraint pXqX pYqY I If all I are spent on X then she buys 0 units of Y and I pX units of X so the bundle purchased is I pX 0 If all I are spent on Y then she buys 0 units of X and I pY units of Y so the bundle purchased is 0 I pY Figure 3 Units of Commodity Y I pY 0 I pY 0 I pX 0 0 I pX Units of Commodity X Figure 3 Units of Commodity Y What is the slope of the budget constraint I pY 0 I pY 0 I pX 0 0 I pX Units of Commodity X Figure 3 Units of Commodity Y What is the slope of the budget constraint pX pY Y units X unit 0 I pY I pY 0 I pX 0 0 I pX Units of Commodity X Figure 3 Units of Commodity Y What is the slope of the budget constraint pX pY Y units X unit 0 I pY To get 1 more X unit the consumer must give up Y units I pY 0 I pX 0 0 1 I pX Units of Commodity X Figure 3 Units of Commodity Y What is the slope of the budget constraint pX pY Y units X unit …