Lecture 1
Consumer Choice:
What can you afford?
Budget constraint (Chapter 2)
What is the best bundle?
preferences (Chapter 3)
How to model preferences?
Utility functions (Chapter 4)
What to choose?
Choice (Chapter 5)
Budget constraint:
Let us say there are two goods x1 and x2 with prices p1 and p2
Consumer has income m.
A consumption bundle is (x1,x2).
The budget constraint defines what a consumer can afford:
Everything that is affordable lies within the budget set
The set of consumption bundles that cost exactly m form the budget line
Op budgetlijn geef je heel je budget uit
,Changes in the budget:
- Income Change: What happens if the income decreases from m to m’ ?
- Price change: What happens if the price of good 1 increases?
de prijs stijgt, dus het budget wordt kleiner waardoor het blauwe oppervlak ook kleiner wordt.
To sum up:
- A change in income causes a parallel shift of the budget line.That is, the slope does not change.
(prices are constant)
- If the price of one good changes, this changes the slope of the budget line.
- Slope is
Preferences: (hoofdletter voor bundel, kleine letter voor elementen bundel) binary relation
- Consumers choose between consumption bundles
- Consider two bundles X= (x1,x2) and Y= (y1,y2)
- If X is strictly preferred to Y, we write:
,- If the consumer is indifferent between X and Y, we write:
- If X is weakly preferred to Y, we write:
“married to” is not reflexive,
because you can’t be married to
yourself
“taller than” is reflexive
, All bundles that lie on an indifference curve are equally good (the consumer is indifferent)
Indifference curves can have many shapes, but they cannot cross!
Wht not? ………
Alles boven/onder is beter/slechter dan indifference curve
Why can an indifference curve not cross
nutten zijn niet hetzelfde, zie rechter plaatje
Indifferent curves are parallel to each other!
Preferences: Perfect Substitutes
- Two goods are substitutes if the consumer is willing to substitute one good for the other at a
constant rate.
- For example
For me, consuming two apples is the same as consuming one orange.
- Two goods are perfect substitutes if the consumer is willing to substitute the goods on a one-to-
one basis.
For me, consuming one apple is the same as consuming one orange. So, i am indifferent between
consuming two apples, two oranges, and one apple and one orange (the total is the only thing
that matters!)
Consumer Choice:
What can you afford?
Budget constraint (Chapter 2)
What is the best bundle?
preferences (Chapter 3)
How to model preferences?
Utility functions (Chapter 4)
What to choose?
Choice (Chapter 5)
Budget constraint:
Let us say there are two goods x1 and x2 with prices p1 and p2
Consumer has income m.
A consumption bundle is (x1,x2).
The budget constraint defines what a consumer can afford:
Everything that is affordable lies within the budget set
The set of consumption bundles that cost exactly m form the budget line
Op budgetlijn geef je heel je budget uit
,Changes in the budget:
- Income Change: What happens if the income decreases from m to m’ ?
- Price change: What happens if the price of good 1 increases?
de prijs stijgt, dus het budget wordt kleiner waardoor het blauwe oppervlak ook kleiner wordt.
To sum up:
- A change in income causes a parallel shift of the budget line.That is, the slope does not change.
(prices are constant)
- If the price of one good changes, this changes the slope of the budget line.
- Slope is
Preferences: (hoofdletter voor bundel, kleine letter voor elementen bundel) binary relation
- Consumers choose between consumption bundles
- Consider two bundles X= (x1,x2) and Y= (y1,y2)
- If X is strictly preferred to Y, we write:
,- If the consumer is indifferent between X and Y, we write:
- If X is weakly preferred to Y, we write:
“married to” is not reflexive,
because you can’t be married to
yourself
“taller than” is reflexive
, All bundles that lie on an indifference curve are equally good (the consumer is indifferent)
Indifference curves can have many shapes, but they cannot cross!
Wht not? ………
Alles boven/onder is beter/slechter dan indifference curve
Why can an indifference curve not cross
nutten zijn niet hetzelfde, zie rechter plaatje
Indifferent curves are parallel to each other!
Preferences: Perfect Substitutes
- Two goods are substitutes if the consumer is willing to substitute one good for the other at a
constant rate.
- For example
For me, consuming two apples is the same as consuming one orange.
- Two goods are perfect substitutes if the consumer is willing to substitute the goods on a one-to-
one basis.
For me, consuming one apple is the same as consuming one orange. So, i am indifferent between
consuming two apples, two oranges, and one apple and one orange (the total is the only thing
that matters!)
