微观经济学英文课件：21theory

1、7 TOPICS FOR FURTHER STUDYThe Theory of Consumer Choice The theory of consumer choice can address such questions as the following : How to derive a typical demand curve? Do all demand curves slope downward? How do wages affect labor supply? How do interest rates affect household saving?THE BUDGET CO

2、NSTRAINT: WHAT THE CONSUMER CAN AFFORD The budget constraint depicts the limit on the consumption “bundles” that a consumer can afford. People consume less than they desire because their spending is constrained, or limited, by their income.THE BUDGET CONSTRAINT: WHAT THE CONSUMER CAN AFFORD The budg

3、et constraint shows the various combinations of goods the consumer can afford given his or her income and the prices of the two goods.The Consumers Budget ConstraintTHE BUDGET CONSTRAINT: WHAT THE CONSUMER CAN AFFORD The Consumers Budget Constraint Any point on the budget constraint line indicates t

4、he consumers 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). Figure 1 The Consumers Budget ConstraintQuantityof PizzaQuantityof Pepsi0Consumersbudget constrain

5、t500B100ATHE BUDGET CONSTRAINT: WHAT THE CONSUMER CAN AFFORD The Consumers Budget Constraint Alternately, the consumer can buy 50 pizzas and 250 pints of Pepsi. Figure 1 The Consumers Budget ConstraintQuantityof PizzaQuantityof Pepsi0Consumersbudget constraint500B25050C100ATHE BUDGET CONSTRAINT: WHA

6、T THE CONSUMER CAN AFFORD 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 can trade one good for the other.THE BUDGET CONSTRAINT: WHAT THE CONSUMER CAN AF

7、FORD The budget constraint line can be described by the following equation: QAPA+QBPB=I or So, the slop is: ,which is the relative price.ABABBQPPPIQBAPPBAPREFERENCES: WHAT THE CONSUMER WANTS A consumers preference among consumption bundles may be illustrated with indifference curves.Representing Pre

8、ferences with Indifference Curves An indifference curve is a curve that shows consumption bundles that give the consumer the same level of satisfaction.Figure 2 The Consumers PreferencesQuantityof PizzaQuantityof Pepsi0Indifferencecurve, I1 I2CBADRepresenting Preferences with Indifference Curves The

9、 Consumers 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 wh

10、ich 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.Figure 2 The Consumers PreferencesQuantityof PizzaQuantityof Pepsi0Indifferencecurve, I1 I21MRSCBADFour Properties of Indifference Curv

11、es Higher indifference curves are preferred to lower ones. Indifference curves are downward sloping. Indifference curves do not cross. Indifference curves are bowed inward.Four Properties of Indifference Curves Property 1: Higher indifference curves are preferred to lower ones. Consumers usually pre

12、fer more of something to less of it. Higher indifference curves represent larger quantities of goods than do lower indifference curves.Figure 2 The Consumers PreferencesQuantityof PizzaQuantityof Pepsi0Indifferencecurve, I1 I2CBADFour Properties of Indifference Curves Property 2: Indifference curves

13、 are downward sloping. A consumer is willing to give up one good only if he or she gets more of the other good in order to remain equally happy. If the quantity of one good is reduced, the quantity of the other good must increase. For this reason, most indifference curves slope downward.Figure 2 The

14、 Consumers PreferencesQuantityof PizzaQuantityof Pepsi0Indifferencecurve, I1 Four Properties of Indifference Curves Property 3: Indifference curves do not cross. Points A and B should make the consumer equally happy. Points B and C should make the consumer equally happy. This implies that A and C wo

15、uld make the consumer equally happy. But C has more of both goods compared to A.Figure 3 The Impossibility of Intersecting Indifference CurvesQuantityof PizzaQuantityof Pepsi0CABFour Properties of Indifference Curves Property 4: Indifference curves are bowed inward. People are more willing to trade

16、away goods that they have in abundance and less willing to trade away goods of which they have little. These differences in a consumers marginal substitution rates cause his or her indifference curve to bow inward. Figure 4 Bowed Indifference CurvesQuantityof PizzaQuantityof Pepsi0Indifferencecurve8

17、3A37B1MRS = 61MRS = 146142Four Properties of Indifference Curves Indifference curves bowed inward is the reflections of the law of diminishing marginal utility. On an indifference curve: n.consumptio sgood a ofunit a increasingen utility wh totalof increase theis which utility, marginal means MUMRSM

18、UMUQQ:isThat , 0QMUQMUBAABBBAAConvex indifference curves and the law of diminishing marginal utility Why the indifference curves are bowed inward or convex? The law of diminishing marginal utility: as the increasing consumption of a good, the marginal utility of the last unit of consumption is decre

19、ase. Because theres tradeoff between any two desirable goods, so when the one goods MU is increasing, the other goods MU is decreasing, which results in the convex indifference curves.Two Extreme Examples of Indifference Curves Perfect substitutes Perfect complementsTwo Extreme Examples of Indiffere

20、nce Curves Perfect Substitutes Two goods with straight-line indifference curves are perfect substitutes. The marginal rate of substitution is a fixed number. Figure 5 Perfect Substitutes and Perfect ComplementsDimes0Nickels(a) Perfect SubstitutesI1I2I3362412Two Extreme Examples of Indifference Curve

21、s Perfect Complements Two goods with right-angle indifference curves are perfect complements.Figure 5 Perfect Substitutes and Perfect ComplementsRight Shoes0LeftShoes(b) Perfect ComplementsI1I27755OPTIMIZATION: WHAT THE CONSUMER CHOOSES Consumers want to get the combination of goods on the highest p

22、ossible indifference curve. However, the consumer must also end up on or below his budget constraint.The Consumers Optimal Choices Combining the indifference curve and the budget constraint determines the consumers optimal choice. Consumer optimum occurs at the point where the highest indifference c

23、urve and the budget constraint are tangent.The Consumers Optimal Choice The consumer chooses consumption of the two goods so that the marginal rate of substitution equals the relative price.n.consumptio optimal thereached hasconsumer ,utility equal has goodeach in spent money ofunit each that whenme

24、ans which,PMUPMU:gives thisgRearrangin ,PPMUMUMRS: is hatTBBAABABAThe Consumers Optimal Choice At the consumers optimum, the consumers valuation (Indifference curve: MRS) of the two goods equals the markets valuation (Budget constraint: relative price).Figure 6 The Consumers OptimumQuantityof PizzaQ

25、uantityof Pepsi0Budget constraintI1I2I3OptimumABHow Changes in Income Affect the Consumers Choices An increase in income shifts the budget constraint outward. The consumer is able to choose a better combination of goods on a higher indifference curve.Figure 7 An Increase in IncomeQuantityof PizzaQua

26、ntityof Pepsi0New budget constraintI1I22. . . . raising pizza consumption . . .3. . . . andPepsiconsumption.Initialbudgetconstraint1. An increase in income shifts thebudget constraint outward . . . InitialoptimumNew optimumHow Changes in Income Affect the Consumers Choices Normal versus Inferior Goo

27、ds If a consumer buys more of a good when his or her income rises, the good is called a normal good. If a consumer buys less of a good when his or her income rises, the good is called an inferior good.Figure 8 An Inferior GoodQuantityof PizzaQuantityof Pepsi0InitialbudgetconstraintNew budget constra

28、intI1I21. When an increase in income shifts thebudget constraint outward . . .3. . . . but Pepsiconsumptionfalls, makingPepsi aninferior good.2. . . . pizza consumption rises, making pizza a normal good . . . InitialoptimumNew optimumHow Changes in Prices Affect Consumers Choices A fall in the price

29、 of any good rotates the budget constraint outward and changes the slope of the budget constraint.Figure 9 A Change in PriceQuantityof PizzaQuantityof Pepsi01,000D500B100AI1I2Initial optimumNew budget constraintInitialbudgetconstraint1. A fall in the price of Pepsi rotates the budget constraint outw

30、ard . . .3. . . . andraising Pepsiconsumption.2. . . . reducing pizza consumption . . .New optimumIncome and Substitution Effects A price change has two effects on consumption. An income effect A substitution effectIncome and Substitution Effects The Income Effect The income effect is the change in

31、consumption that results when a price change moves the consumer to a higher or lower indifference curve. The Substitution Effect The substitution effect is the change in consumption that results when a price change moves the consumer along an indifference curve to a point with a different marginal r

32、ate of substitution.Income and Substitution Effects A Change in Price: Substitution Effect A price change first causes the consumer to move from one point on an indifference curve to another on the same curve. Illustrated by movement from point A to point B. A Change in Price: Income Effect After mo

33、ving from one point to another on the same curve, the consumer will move to another indifference curve. Illustrated by movement from point B to point C.Figure 10 Income and Substitution EffectsQuantityof PizzaQuantityof Pepsi0I1I2AInitial optimumNew budget constraintInitialbudgetconstraintSubstituti

34、oneffectSubstitution effectIncomeeffectIncome effectBC New optimumTable 1 Income and Substitution Effects When the Price of Pepsi FallsDeriving the Demand Curve A consumers demand curve can be viewed as a summary of the optimal decisions that arise from his or her budget constraint and indifference

35、curves.Figure 11 Deriving the Demand CurveQuantityof Pizza0Demand(a) The Consumer s OptimumQuantityof Pepsi0Price ofPepsi(b) The Demand Curve for PepsiQuantityof Pepsi250$2A7501BI1I2New budget constraintInitial budget constraint750B250AFigure 11 Deriving the Demand CurveFigure 11 Deriving the Demand

36、 CurvePriceof PepsiQuantityof PizzaQuantityof PepsiABABTHREE APPLICATIONS Do all demand curves slope downward? Demand curves can sometimes slope upward. This happens when a consumer buys more of a good when its price rises. Giffen goods Economists use the term Giffen good to describe a good that vio

37、lates the law of demand. Giffen goods are goods for which an increase in the price raises the quantity demanded. The income effect dominates the substitution effect. They have demand curves that slope upwards.Figure 12 A Giffen GoodQuantityof MeatQuantity ofPotatoes0I2I1Initial budget constraintNew

38、budgetconstraintDAB2. . . . which increasespotatoconsumptionif potatoesare a Giffengood.Optimum with lowprice of potatoesOptimum with highprice of potatoesEC1. An increase in the price ofpotatoes rotates the budgetconstraint inward . . .EGiffen goods What causes the Giffen goods? Income effect and s

39、ubstitution effect. Giffen goods must be inferior goods, but inferior goods may not be Giffen goods.THREE APPLICATIONS How do wages affect labor supply? If the substitution effect is greater than the income effect for the worker, he or she works more. If income effect is greater than the substitutio

40、n effect, he or she works less.Figure 13 The Work-Leisure DecisionHours of Leisure0Consumption$5,000100I3I2I1Optimum2,00060Figure 14 An Increase in the WageHours ofLeisure0Consumption(a) For a person with these preferences . . .Hours of LaborSupplied0Wage. . . the labor supply curve slopes upward.I1

41、I2BC2BC12. . . . hours of leisure decrease . . .3. . . . and hours of labor increase.1. When the wage rises . . .Labor supplyFigure 14 An Increase in the WageHours ofLeisure0Consumption(b) For a person with these preferences . . .Hours of LaborSupplied0Wage. . . the labor supply curve slopes backwar

42、d.I1I2BC2BC11. When the wage rises . . .2. . . . hours of leisure increase . . .3. . . . and hours of labor decrease.Labor supplyFigure 14 An Increase in the WageHours ofLeisure0Consumption(a) For a person with these preferences . . .Hours of LaborSupplied0Wage. . . the labor supply curve slopes upw

43、ard.I1I2BC2BC12. . . . hours of leisure decrease . . .3. . . . and hours of labor increase.1. When the wage rises . . .Labor supplyFigure 14 An Increase in the Wage One noteworthy problem: see to panel (b) , why should consumption can rise a little more under the condition that hours of leisure incr

44、ease?THREE APPLICATIONS How do interest rates affect household saving? If the substitution effect of a higher interest rate is greater than the income effect, households save more. If the income effect of a higher interest rate is greater than the substitution effect, households save less.Figure 15

45、The Consumption-Saving DecisionConsumptionwhen Young0Consumptionwhen Old$110,000100,000I3I2I1Budgetconstraint55,000$50,000OptimumFigure 16 An Increase in the Interest Rate0(a) Higher Interest Rate Raises Saving(b) Higher Interest Rate Lowers SavingConsumptionwhen OldI1I2BC1BC20I1I2BC1BC2Consumptionw

46、hen OldConsumptionwhen Young1. A higher interest rate rotatesthe budget constraint outward . . .1. A higher interest rate rotatesthe budget constraint outward . . .2. . . . resulting in lowerconsumption when young and, thus, higher saving.2. . . . resulting in higherconsumption when youngand, thus,

47、lower saving.Consumptionwhen YoungTHREE APPLICATIONS Thus, an increase in the interest rate could either encourage or discourage saving.Homework Questions* 1. If you have to choose between two cities, say, Guangzhou v.s. Zhuhai, that means to choose between economic growth and pollution, whats your

48、optimal choice? Explain it by using the theory of consumer choice. 2. If your parents have provided you a trust fund for your college education. You can receive the entire trust fund on the condition that you spend it only on education. Typically, the trust fund is a welcome gift to you but perhaps not as welcome as an unrestricted trust would be. Why?Homework Questions*l 3. The simplified version of demand curve is a downward-slop