Consumer DemandDemand & Rational ChoiceSlide 3Slide 4Consumption BundlesSlide 6Restrictions on ChoiceBudget ConstraintSlide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Exercises on Budget Constraints and Budget SetsSlide 38Slide 39Slide 40Slide 41Slide 42Slide 43Slide 44Slide 45Slide 46Slide 47Slide 48How Income Changes Affect Consumption OpportunitiesSlide 50Slide 51Budget Set Changes with IncomeSlide 53Slide 54Budget Set Changes Due to a Price Change.Slide 56Slide 57Slide 58Slide 59Exercises on Changes to Income and Prices.Slide 61Slide 62Slide 63Slide 64Slide 65Slide 66Slide 67Slide 68Slide 69Slide 70Slide 71Slide 72Slide 73Slide 74Slide 75Slide 76Slide 77Consumers’ PreferencesSlide 79Slide 80Slide 81Slide 82Slide 83Utility FunctionsSlide 85Slide 86Slide 87Slide 88Slide 89Slide 90Rational ChoiceSlide 92Slide 93Slide 94Exercises on Rational ChoiceSlide 96Slide 97Slide 98Slide 99Marginal UtilitiesSlide 101Slide 102Slide 103Slide 104Slide 105Slide 106Slide 107Slide 108Slide 109Slide 110Slide 111Slide 112Slide 113Slide 114Slide 115Slide 116Slide 117Slide 118Slide 119Slide 120Slide 121Slide 122Slide 123Slide 124Slide 125Preferences - continuedExercises on Marginal UtilitiesSlide 128Slide 129Slide 130Slide 131Slide 132Slide 133Slide 134Slide 135Slide 136Slide 137Slide 138Rationally Allocating A Scarce BudgetSlide 140Slide 141Rationally Allocating A Scarce Budget (pX = $1/unit of X, pY = $1/unit of Y)Slide 143Slide 144Slide 145Slide 146Slide 147Slide 148Slide 149Slide 150Slide 151Slide 152Slide 153Slide 154Slide 155Slide 156Slide 157Slide 158Slide 159Rationally Allocating A Scarce Budget (pX = $2/unit of X, pY = $1/unit of Y)Slide 161Rationally Allocating A Scarce Budget (pX = $2/unit of X, pY = $1/unit of Y)Slide 163Slide 164Slide 165Slide 166Slide 167Slide 168Slide 169Slide 170Slide 171Slide 172Slide 173Slide 174Slide 175Slide 176Slide 177Compare the Two Budget Allocation ProblemsImproving Upon A Budget AllocationSlide 180Slide 181Slide 182Slide 183Slide 184Slide 185Slide 186Slide 187Slide 188Slide 189Slide 190Slide 191Slide 192Slide 193Slide 194Slide 195Slide 196Exercises On Improving Upon A Budget AllocationSlide 198Slide 199Slide 200Slide 201Slide 202Consumer DemandThe Consequences of Rational Choices by ConsumersDemand & 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.Quantity of CookiesQuantity of SandwichesFigure 1Consumption Bundles0 1 2 3 401234(3,1)(2,4)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).Quantity of CookiesQuantity of SandwichesFigure 20 2 4 6 8 1204681012102(8,0)(0,12)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).Quantity of CookiesQuantity of SandwichesFigure 20 2 4 6 8 1204681012102(8,0)(0,12)(4,6)Quantity of CookiesQuantity of SandwichesFigure 20 2 4 6 8 1204681012102(8,0)(0,12)(4,6)Budget constraintQuantity of CookiesQuantity of SandwichesFigure 20 2 4 6 8 1204681012102(8,0)(0,12)(4,6)Budget constraintWhat area contains all theWhat area contains all thebundles from which the consumer bundles from which the consumer can choose?can choose?0 2 4 6 8 1204681012102(8,0)(0,12)(4,6)Budget constraintBudget setQuantity of CookiesQuantity of SandwichesFigure 2What area contains all theWhat area contains all thebundles from which the consumer bundles from which the consumer can choose? can choose? The area “on and The area “on and inside the budget constraint.”inside the budget constraint.”0 2 4 6 8 1204681012102(8,0)(0,12)(4,6)Budget constraintBudget setQuantity of CookiesQuantity of SandwichesFigure 2What area contains the bundlesWhat area contains the bundlesthe consumer cannot choose?the consumer cannot choose?What area contains all theWhat area contains all thebundles from which the consumer bundles from which the consumer can choose? can choose? The area “on and The area “on and inside the budget constraint.”inside the budget constraint.”What area contains the bundlesWhat area contains the bundlesthe consumer cannot choose? the consumer cannot choose? Everywhere “outside the budgetEverywhere “outside the budget constraint.”constraint.”What area contains all theWhat area contains all thebundles from which the consumer bundles from which the consumer can choose? can choose? The area “on and The area “on and inside the budget constraint.”inside the budget constraint.”0