🪩
Unit 3 - Scarcity & Work
📘 MODEL OF CONSUMER
CHOICE
- Preferences -
Unit 3 - Scarcity & Work 1
, ✨ 🔷 The Big Idea: Scarcity
✦ Decision-Making Under Scarcity
Scarcity exists because:
We have limited resources
We have unlimited wants
So every choice involves a trade-off.
Economists model this by:
1️⃣ Defining feasible actions
→ What can you actually afford or do?
2️⃣ Choosing the best feasible option
→ Assuming the person is rational
⚠️ This model helps answer:
What is the optimal basket of goods given income & prices?
How much time should someone work vs enjoy leisure?
It also explains:
Differences in working hours across countries
Why working hours changed over history
This model appears repeatedly in economics. Master it now and future-you will suffer less.
✦ Structure of The Model
Consumer choice depends on:
Component What It Means
Preferences What you like
Consumption Possibilities What you can afford
Choice Best affordable option
🐬Preferences
A rational consumer can compare any two bundles A and B:
🐬Utility
✦ What is Utility?
Prefer A to B
Utility = a numerical measure of satisfaction.
Prefer B to A Important:
Be indifferent between A and B If A preferred to B → U(A) > U(B)
Assumption: If indifferent → U(A) = U(B)
Preferences are consistent. Example:
No chaos. No emotional spirals. Just logic. U(A) = 10
U(B) = 5
A is chosen.
⚠️ Important Clarification
Utility numbers:
Are arbitrary
Have no intrinsic meaning
Only ranking matters
Generally:
More consumption → More utility
(Yes, even if that means too much soda
and regret.)
Unit 3 - Scarcity & Work 2
, ✨ 🔷 Indifference Curves
✦ Definition
An indifference curve shows all combinations of two goods that give the same level of utility.
Key Interpretation
Points above curve → higher utility → preferred
Points on curve → equal utility
Points below curve → lower utility
Point C and G lie on
same curve →
Consumer is
indifferent.
✦ Preference Map
One indifference curve is not enough.
A preference map:
Is a set of indifference curves
Covers all possible bundles
Higher curves = higher utility
Think of it like contour lines on a
mountain.
Higher = better.
🐬Properties of Indifference Curves
1️⃣ Downward Sloping 2️⃣ Higher Curves = Higher Utility 3️⃣ Smooth
Because of trade-offs: Always. Preferences are continuous.
If you get more X, you must give up Y
to stay equally satisfied.
4️⃣ Never Cross 5️⃣ Convex (Gets Flatter as You Move Right)
If they crossed: This is extremely important.
Preferences would be inconsistent. As you consume more X:
Economics would collapse. You are willing to give up less Y for additional X.
Society would fall. This reflects diminishing marginal rate of substitution.
Unit 3 - Scarcity & Work 3
Unit 3 - Scarcity & Work
📘 MODEL OF CONSUMER
CHOICE
- Preferences -
Unit 3 - Scarcity & Work 1
, ✨ 🔷 The Big Idea: Scarcity
✦ Decision-Making Under Scarcity
Scarcity exists because:
We have limited resources
We have unlimited wants
So every choice involves a trade-off.
Economists model this by:
1️⃣ Defining feasible actions
→ What can you actually afford or do?
2️⃣ Choosing the best feasible option
→ Assuming the person is rational
⚠️ This model helps answer:
What is the optimal basket of goods given income & prices?
How much time should someone work vs enjoy leisure?
It also explains:
Differences in working hours across countries
Why working hours changed over history
This model appears repeatedly in economics. Master it now and future-you will suffer less.
✦ Structure of The Model
Consumer choice depends on:
Component What It Means
Preferences What you like
Consumption Possibilities What you can afford
Choice Best affordable option
🐬Preferences
A rational consumer can compare any two bundles A and B:
🐬Utility
✦ What is Utility?
Prefer A to B
Utility = a numerical measure of satisfaction.
Prefer B to A Important:
Be indifferent between A and B If A preferred to B → U(A) > U(B)
Assumption: If indifferent → U(A) = U(B)
Preferences are consistent. Example:
No chaos. No emotional spirals. Just logic. U(A) = 10
U(B) = 5
A is chosen.
⚠️ Important Clarification
Utility numbers:
Are arbitrary
Have no intrinsic meaning
Only ranking matters
Generally:
More consumption → More utility
(Yes, even if that means too much soda
and regret.)
Unit 3 - Scarcity & Work 2
, ✨ 🔷 Indifference Curves
✦ Definition
An indifference curve shows all combinations of two goods that give the same level of utility.
Key Interpretation
Points above curve → higher utility → preferred
Points on curve → equal utility
Points below curve → lower utility
Point C and G lie on
same curve →
Consumer is
indifferent.
✦ Preference Map
One indifference curve is not enough.
A preference map:
Is a set of indifference curves
Covers all possible bundles
Higher curves = higher utility
Think of it like contour lines on a
mountain.
Higher = better.
🐬Properties of Indifference Curves
1️⃣ Downward Sloping 2️⃣ Higher Curves = Higher Utility 3️⃣ Smooth
Because of trade-offs: Always. Preferences are continuous.
If you get more X, you must give up Y
to stay equally satisfied.
4️⃣ Never Cross 5️⃣ Convex (Gets Flatter as You Move Right)
If they crossed: This is extremely important.
Preferences would be inconsistent. As you consume more X:
Economics would collapse. You are willing to give up less Y for additional X.
Society would fall. This reflects diminishing marginal rate of substitution.
Unit 3 - Scarcity & Work 3
