【正文】 2020 Pearson AddisonWesley Inferior Goods For an inferior good, when ine increases, the quantity bought decreases. The ine effect is negative and works against the substitution effect. As long as the substitution effect dominates, the demand curve still slopes downward. Predicting Consumer Choices 169。 2020 Pearson AddisonWesley Ine Effect To isolate the ine effect, we reverse the hypothetical pay cut and restore Lisa’s ine to its original level (its actual level). Lisa is now back on indifference curve I2 and her best affordable point is J. The move from K to J is the ine effect. Predicting Consumer Choices 169。 2020 Pearson AddisonWesley To isolate the substitution effect, we give Lisa a hypothetical pay cut. Lisa is now back on her original indifference curve but with a lower price of movies and her best affordable point is K. The move from C to K is the substitution effect. Predicting Consumer Choices 169。 2020 Pearson AddisonWesley We’re going to break the move from point C to point J into two parts: 1. The substitution effect 2. The ine effect Predicting Consumer Choices 169。 2020 Pearson AddisonWesley Predicting Consumer Choices Substitution Effect and Ine Effect For a normal good, a fall in price always increases the quantity consumed. We can prove this assertion by dividing the price effect in two parts: Substitution effect Ine effect 169。 2020 Pearson AddisonWesley A Change in Ine The effect of a change in ine on the quantity of a good consumed is called the ine effect. Figure illustrates the effect of a decrease in Lisa’s ine. Initially, Lisa consumes at point J in part (a) and at point B on demand curve D0 in part (b). Predicting … 169。 2020 Pearson AddisonWesley Predicting … A Change in Price The effect of a change in the price of a good on the quantity of the good consumed is called the price effect. Figure illustrates the price effect and shows how the consumer’s demand curve is generated. Initially, the price of a movie is $8 and Lisa consumes at point C in part (a) and at point A in part (b). 169。 2020 Pearson AddisonWesley Here, the best affordable point is C. Lisa can afford to consume more soda and see fewer movies at point F. And she can afford to see more movies and consume less soda at point H. But she is indifferent between F, I, and H and she prefers C to I. Predicting Consumer Choices 169。 2020 Pearson AddisonWesley Degree of Substitutability The shape of the indifference curves reveals the degree of substitutability between two goods. Figure shows the indifference curves for ordinary goods, perfects substitutes, and perfect plements. Preferences and Indifference Curves 169。 2020 Pearson AddisonWesley A diminishing marginal rate of substitution is the key assumption of consumer theory. A diminishing marginal rate of substitution is a general tendency for a person to be willing to give up less of good y to get one more unit of good x, while at the same time remain indifferent as the quantity of good x increases. Preferences and Indifference Curves 169。 2020 Pearson AddisonWesley Marginal Rate of Substitution The marginal rate of substitution, (MRS) measures the rate at which a person is willing to give up good y to get an additional unit of good x while at the same time remain indifferent (remain on the same indifference curve). The magnitude of the slope of the indifference curve measures the marginal rate of substitution. Preferences and Indifference Curves 169。 2020 Pearson AddisonWesley A preference map is series of indifference curves. Call the indifference curve that we’ve just seen I1. I0 is an indifference curve below I1. Lisa prefers any point on I1 to any point on I0 . Preferences and Indifference Curves 169。 2020 Pearson AddisonWesley Preferences and Indifference Curves Lisa can sort all possible binations of goods into three groups: preferred, not preferred, and indifferent. An indifference curve joins all those points that Lisa says are just as good as C. G is such a point. Lisa is indifferent between C and G. 169。 2020 Pearson AddisonWesley A Change in Ine An change in money ine brings a parallel shift of the budget line. The slope of the budget line doesn’t change because the relative price doesn’t change. Figure (b) shows the effect of a fall in ine. Consumption Possibilities 169。 2020 Pearson AddisonWesley A household’s real ine is the ine expressed as a quantity of goods the household can afford to buy. Lisa’s real ine in terms of soda is the point on her budget line where it meets the yaxis. A relative price is the price of one good divided by the price of another good. Relative price is the magnitude of the slope of the budget line. The relative price shows how many cases of soda must be fone to see an additional movie. Consumption Possibilities 169。 2020 Pearson AddisonWesley The Budget Equation We can describe the budget line by using a budget equation. The budget equation states that Expenditure = Ine Call the price of soda PS, the quantity of soda QS, the price of a movie PM, the quantity of movies QM, and ine Y. Lisa’s budget equation is: PSQS + PMQM = Y. Consumption Possibilities 169。 2020 Pearson AddisonWesley Consumption Possibilities Lisa can afford any of the binations at points A to F. Some goods are indivisible goods and must be bought in whole units at the points marked (such as movies).