ECON 201 SECTION 3: “Microeconomics”
The Theory of Consumer Choice
Group 6
Lecturer:
Mr. Hoeurn Cheb
Group Members:
David An, Titsinara Morn, Ratana Reth
Presentation Script
1. Introduction
Hello professor and everyone, I’m the representative of Group 6 which
consists three members such as Me (David), Titsinara, and Ratana.
(Next slide) Today we gonna recap the second part of Chapter 21 that contains
four main points like Optimization: What the Consumer Chooses, Three
Applications, Case Study, and the last one is Conclusion.
2. The Consumer’s Optimal Choices
(Next slide) Once again, consider our pizza and Pepsi example. The consumer
would like to end up with the best possible combination of pizza and Pepsi for her
—that is, the combination on her highest possible indifference curve. But the
consumer must also end up on or below her budget constraint, which measures the
total resources available to her. Figure 6 shows the consumer’s budget constraint
and three of her many indifference curves.
(Next slide) The highest indifference curve that the consumer can reach (I2 in
the figure) is the one that just barely touches her budget constraint. The point at
which this indifference curve and the budget constraint touch is called the optimum.
The consumer would prefer point A, but she cannot afford that point because it lies
above her budget constraint. The consumer can afford point B, but that point is on a
lower indifference curve and, therefore, provides the consumer less satisfaction.
The optimum represents the best combination of pizza and Pepsi available to the
consumer.
Notice that, at the optimum, the slope of the indifference curve equals the
slope of the budget constraint. We say that the indifference curve is tangent to the
budget constraint. The slope of the indifference curve is the marginal rate of
substitution between pizza and Pepsi, and the slope of the budget constraint is the
relative price of pizza and Pepsi. Thus, the consumer chooses consumption of the
two goods so that the marginal rate of substitution equals the relative price.
3. How Changes in Income Affect the Consumer’s Choices
(Next slide) Suppose that income increases. With higher income, the
consumer can afford more of both goods. The increase in income,
therefore, shifts the budget constraint outward, as in Figure 7.
(Next slide) Because the relative price of the two goods has not changed,
the slope of the new budget constraint is the same as the slope of the initial
budget constraint. That is, an increase in income leads to a parallel shift in
the budget constraint. The expanded budget constraint allows the consumer
to choose a better combination of pizza and Pepsi, one that is on a higher
indifference curve. Given the shift in the budget constraint and the
consumer’s preferences as represented by her indifference curves, the
consumer’s optimum moves from the point labeled “initial optimum” to the
point labeled “new optimum.” Notice that, in Figure 7, the consumer
chooses to consume more Pepsi and more pizza. The logic of the model
does not require increased consumption of both goods in response to
increased income, but this situation is the most common. As you may recall
from Chapter 4, if a consumer wants more of a good when her income
rises, economists call it a normal good. The indifference curves in Figure 7
are drawn under the assumption that both pizza and Pepsi are normal
goods.
(Next slide) Figure 8 shows an example in which an increase in income
induces the consumer to buy more pizza but less Pepsi. If a consumer buys
less of a good when her income rises, economists call it an inferior good.
Figure 8 is drawn under the assumption that pizza is a normal good and
Pepsi is an inferior good. Although most goods in the world are normal
goods, there are some inferior goods as well. An example is bus rides. As
income increases, consumers are more likely to own cars or take taxis and
less likely to ride the bus. Bus rides, therefore, are an inferior good.
