Lecture 7 Consumer Demand Theory

1
Lecture 7 - Consumer Demand Theory

• Wissinks Words

2
remarks

• Consumer theory - Why?
• Two reasons
• to understand the foundations of market demand
  (bake the demand curve from scratch)
• to address several interesting consumer theory
  issues that are best understood using this model

3
hints

• Againlike two blades of a scissors. Need to
  understand each individually and then use them
  together.
• Preferences describe how the consumer feels about
  different bundles. They tell us what one is
  willing to do.
• The budget line tells us what the consumer is
  able to do.

4

• A utility function and its indifference curve map
  capture the consumers preferences in a very
  compact way.
• The budget set captures what the consumer can do
  in a very compact way.
• The consumer wants to maximize his utility
  subject to his budget constraint.

5

• Utility is at a maximum when the ratio of the
  marginal utilities of the two goods is equal to
  the ratio of their prices.
• The slope of the indifference curve is equal to
  the slope of the budget line.

6

• Another way to think of this condition, after
  rearranging a few things
• MUW/ PW MUR/ PR
• This is the well-known bang-per-buck
  representation of the consumer optimum.

7

• Important to remember what is and what is not a
  choice variable for the consumer.
• The consumer chooses the amounts of goods W and R
  in the optimal bundle.
• The prices for W and R, income and the consumers
  preferences are assumed to be givens for the
  optimization exercise.