【正文】 27 169。2020 Pearson Education, Inc. Indifference Curves ?The shapes of indifference curves describe how a consumer is willing to substitute one good for another ?A to B, give up 6 clothing to get 1 food ?D to E, give up 2 clothing to get 1 food ?The more clothing and less food a person has, the more clothing they will give up to get more food Chapter 3 23 169。2020 Pearson Education, Inc. U2 U3 Indifference Map Food Clothing U1 A B D Market basket A is preferred to B. Market basket B is preferred to D. Chapter 3 20 169。 G Indifference Curves: An Example Food 10 20 30 40 10 20 30 40 Clothing 50 U1 G D A E H B Chapter 3 16 169。2020 Pearson Education, Inc. Indifference Curves: An Example ?Points such as B amp。2020 Pearson Education, Inc. Consumer Preferences ?Consumer preferences can be represented graphically using indifference curves ?Indifference curves represent all binations of market baskets that the person is indifferent to ?A person will be equally satisfied with either choice Chapter 3 11 169。2020 Pearson Education, Inc. Consumer Behavior ? There are three steps involved in the study of consumer behavior 1. Consumer Preferences ? To describe how and why people prefer one good to another 2. Budget Constraints ? People have limited ines Chapter 3 7 169。2020 Pearson Education, Inc. Introduction ?How are consumer preferences used to determine demand? ?How do consumers allocate ine to the purchase of different goods? ?How do consumers with limited ine decide what to buy? Chapter 3 3 169。2020 Pearson Education, Inc. Introduction ?How can we determine the nature of consumer preferences for observations of consumer behavior? ?How can cost of living indexes measure the wellbeing of consumers? Chapter 3 4 169。2020 Pearson Education, Inc. Consumer Behavior 3. Given preferences and limited ines, what amount and type of goods will be purchased? ? What bination of goods will consumers buy to maximize their satisfaction? Chapter 3 8 169。2020 Pearson Education, Inc. Indifference Curves: An Example Market Basket Units of Food Units of Clothing A 20 30 B 10 50 D 40 20 E 30 40 G 10 20 H 10 40 Chapter 3 12 169。 D have more of one good but less of another pared to A ?Need more information about consumer ranking ?Consumer may decide they are indifferent between B, A and D ?We can then connect those points with an indifference curve Chapter 3 15 169。2020 Pearson Education, Inc. Indifference Curves ?Any market basket lying northeast of an indifference curve is preferred to any market basket that lies on the indifference curve ?Points on the curve are preferred to points southwest of the curve Chapter 3 17 169。2020 Pearson Education, Inc. Indifference Maps ?Indifference maps give more information about shapes of indifference curves ?Indifference curves cannot cross ? Violates assumption that more is better ?Why? What if we assume they can cross? Chapter 3 21 169。2020 Pearson Education, Inc. A B D E G 1 6 1 1 4 2 1 1 Observation: The amount of clothing given up for 1 unit of food decreases from 6 to 1 Indifference Curves Food Clothing 2 3 4 5 1 2 4 6 8 10 12 14 16 Chapter 3 24 169。2020 Pearson Education, Inc. Marginal Rate of Substitution ?The MRS decreases as we move down the indifference curve ?Along an indifference curve there is a diminishing marginal rate of substitution. ?The MRS went from 6 to 4 to 1 Chapter 3 28 169。2020 Pearson Education, Inc. Consumer Preferences ?Perfect Complements ?Two goods are perfect plements when the indifference curves for the goods are shaped as right angles ?Example: If you have 1 left shoe and 1 right shoe, you are indifferent between having more left shoes only ? Must have one right for one left Chapter 3 32 169。2020 Pearson Education, Inc. Consumer Preferences: An Application ?In designing new cars, automobile executives must determine how much time and money to invest in restyling versus increased performance ?Higher demand for car with better styling and performance ?Both cost more to improve Chapter 3 36 169。2020 Pearson Education, Inc. Consumer Preferences: An Application ?Knowing which group dominates the market will help decide where redesigning dollars should go ?A recent study in the US shows that over the past two decades, most consumers have preferred styling over performance Chapter 3 40 169。2020 Pearson Education, Inc. Utility Example Market Basket Food Clothing Utility A 8 3 8 + 2(3) = 14 B 6 4 6 + 2(4) = 14 C 4 4 4 + 2(4) = 12 Consumer is indifferent between A amp。2020 Pearson Education, Inc. Utility ?Although we numerically rank baskets and indifference curves, numbers are ONLY for ranking ?A utility of 4 is not necessarily twice as good as a utility of 2 ?There are two types of rankings ?Ordinal ranking ?Cardinal ranking Chapter 3 47 169。2020 Pearson Education, Inc. Budget Constraints ?The Budget Line ?Indicates all binations of two modities for which total money spent equals total ine ?We assume only 2 goods are consumed, so we do not consider savings Chapter 3 51 169。2020 Pearson Education, Inc. Budget Constraints Market Basket Food PF = $1 Clothing PC = $2 Ine I = PFF + PCC A 0 40 $80 B 20 30 $80 D 40 20 $80 E 60 10 $80 G 80 0 $80 Chapter 3 55 169。2020 Pearson Education, Inc. The Budget Line YXPPPIYPXPIYPXPIYXYYXYX??????Chapter 3 59 169。2020 Pearson Education, Inc. The Budget Line Changes ?The Effects of Changes in Ine ?A decrease in ine causes the budget line to shift inward, parallel to the original line (holding prices constant) ?Can buy less of both goods with less ine Chapter 3 63 169。2020 Pearson Educ