【正文】 Education, Inc. The Budget Line Changes ?The Effects of Changes in Prices ?If the two goods decrease in price, but the ratio of the two prices is unchanged, the slope will not change ?However, the budget line will shift outward parallel to the original budget line Chapter 3 69 169。2020 Pearson Education, Inc. The Budget Line Changes ?The Effects of Changes in Prices ?If the price of one good increases, the budget line shifts inward, pivoting from the other good’s intercept. ?If the price of food increases and you buy only food (xintercept), then you can’t buy as much food. The xintercept shifts in. ?If you buy only clothing (yintercept), you can buy the same amount. No change in yintercept. Chapter 3 65 169。2020 Pearson Education, Inc. The Budget Line ?As we know, ine and prices can change ?As ines and prices change, there are changes in budget lines ?We can show the effects of these changes on budget lines and consumer choices Chapter 3 61 169。2020 Pearson Education, Inc. The Budget Line ?As consumption moves along a budget line from the intercept, the consumer spends less on one item and more on the other ?The slope of the line measures the relative cost of food and clothing ?The slope is the negative of the ratio of the prices of the two goods Chapter 3 57 169。2020 Pearson Education, Inc. ICPFP CF ??The Budget Line ?The budget line then can be written: All ine is allocated to food (F) and/or clothing (C) Chapter 3 53 169。2020 Pearson Education, Inc. Utility ?The actual unit of measurement for utility is not important ?An ordinal ranking is sufficient to explain how most individual decisions are made Chapter 3 49 169。2020 Pearson Education, Inc. Utility Example ?Baskets for each level of utility can be plotted to get an indifference curve ?To find the indifference curve for a utility of 14, we can change the binations of food and clothing that give us a utility of 14 Chapter 3 45 169。2020 Pearson Education, Inc. Consumer Preferences ?Utility ?A numerical score representing the satisfaction that a consumer gets from a given market basket ?If buying 3 copies of Microeconomics makes you happier than buying one shirt, then we say that the books give you more utility than the shirt Chapter 3 42 169。2020 Pearson Education, Inc. Consumer Preferences: An Application These consumers place a greater value on performance than styling Styling Performance Chapter 3 38 169。2020 Pearson Education, Inc. Consumer Preferences ?We have assumed all our modities are “goods” ?There are modities we don’t want more of bads ?Things for which less is preferred to more ?Examples ?Air pollution ?Asbestos Chapter 3 34 169。2020 Pearson Education, Inc. Marginal Rate of Substitution ?Perfect Substitutes ?Two goods are perfect substitutes when the marginal rate of substitution of one good for the other is constant ?Example: a person might consider apple juice and orange juice perfect substitutes ? They would always trade 1 glass of OJ for 1 glass of Apple Juice Chapter 3 30 169。2020 Pearson Education, Inc. Marginal Rate of Substitution Food 2 3 4 5 1 Clothing 2 4 6 8 10 12 14 16 A B D E G 6 1 1 1 1 4 2 1 MRS = 6 MRS = 2 FCM R S ????Chapter 3 26 169。 D ?B must be indifferent to D but that can’t be if B is preferred to D U1 U1 U2 U2 A B D Chapter 3 22 169。2020 Pearson Education, Inc. Indifference Curves ?To describe preferences for all binations of goods/services, we have a set of indifference curves – an indifference map ?Each indifference curve in the map shows the market baskets among which the person is indifferent Chapter 3 19 169。 D ?E is preferred to points on U1 ?Points on U1 are preferred to H amp。2020 Pearson Education, Inc. The consumer prefers A to all binations in the yellow box, while all those in the pink box are preferred to A. Indifference Curves: An Example Food 10 20 30 40 10 20 30 40 Clothing 50 G A E H B D Chapter 3 14 169。2020 Pearson Education, Inc. Consumer Preferences – Basic Assumptions 1. Preferences are plete ? Consumers can rank market baskets 2. Preferences are transitive ? If they prefer A to B, and B to C, they must prefer A to C 3. Consumers always prefer more of any good to less ? More is better Chapter 3 10 169。2020 Pearson Education, Inc. Consumer Behavior ?The theory of consumer behavior can be used to help answer these and many more questions ?Theory of consumer behavior ?The explanation of how consumers allocate ine to the purchase of different goods and services Chapter 3 6 169。Chapter 3 Consumer Behavior Chapter 3 2 169。2020 Pearson Education, Inc. Consumer Behavior Applications 1. How would General Mills determine the price to charge for a new cereal before it went to the market? 2. To what extent did the food stamp program provide individuals with more food versus merely subsidizing food they bought anyway? Chapter 3 5 169。2020 Pearson Education, Inc. Consumer Preferences ?How might a consumer pare different groups of items available for purchase? ?A market basket is a collection of one or more modities ?Individuals can choose between market baskets containing different goods Chapter 3 9 169。2020 Pearson Education, Inc. Indifference Curves: An Example ?Graph the points with one good on the xaxis and one good on the yaxis ?Plotting the points, we can make some immediate observations about preferences ?More is better Chapter 3 13 169。2020 Pearson Education, Inc. ?Indifferent between points B, A, amp。2020 Pearson Education, Inc. Indifference Curves ?Indifference curves slope downward to the right ?If they sloped upward, they would violate the assumption that more is