The Consumers budget Constraint Any point on the budget constraint line indicates the consumer's combination or tradeoff between two goods For example, if the consumer buys no pizzas, he can afford 500 pints of Pepsi (point B). If he buys no Pepsi, he can afford 100 pizzas (point A) The slope of the budget constraint line equals the relative price of the two goods, that is, the price of one good compared to the price of the other o It measures the rate at which the consumer wil trade one good for the other
The Consumer’s Budget Constraint • Any point on the budget constraint line indicates the consumer’s combination or tradeoff between two goods. • For example, if the consumer buys no pizzas, he can afford 500 pints of Pepsi (point B). If he buys no Pepsi, he can afford 100 pizzas (point A). • The slope of the budget constraint line equals the relative price of the two goods, that is, the price of one good compared to the price of the other. • It measures the rate at which the consumer will trade one good for the other
Preferences What the Consumer Wants o A consumer's preference among consumption bundles may be illustrated with indifference curves An indifference curve shows bundles of goods that make the consumer equally happy
Preferences: What the Consumer Wants •A consumer’s preference among consumption bundles may be illustrated with indifference curves. •An indifference curve shows bundles of goods that make the consumer equally happy
The Consumer's preferences Quantity of Pepsi C B A Indifference curve, I 0 Quantity of pizza
The Consumer’s Preferences Quantity of Pizza Quantity of Pepsi 0 C B A Indifference curve, I1 D I2
Preferences What the Consumer Wants The consumer's preferences The consumer is indifferent, or equally happy, with the combinations shown at points A, B and c because they are all on the same curve The marginal Rate of Substitution The slope at any point on an indifference curve is the marginal rate of substitution e It is the rate at which a consumer is willing to trade one good for another o It is the amount of one good d tha at a consumer requires as compensation to give up one unit of the other good
Preferences: What the Consumer Wants • The Consumer’s Preferences – The consumer is indifferent, or equally happy, with the combinations shown at points A, B, and C because they are all on the same curve. • The Marginal Rate of Substitution – The slope at any point on an indifference curve is the marginal rate of substitution. •It is the rate at which a consumer is willing to trade one good for another. •It is the amount of one good that a consumer requires as compensation to give up one unit of the other good
The Consumer's preferences Quantity of Pepsi B MRS Indifference A curve, I1 0 Quantity of pizza
The Consumer’s Preferences Quantity of Pizza Quantity of Pepsi 0 Indifference curve, I1 I2 1 MRS C B A D