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Theory of Consumer Choice (Indifference curve (Indifference curves are…
Theory of Consumer Choice
Budget constraint
Consumption "bundles" that a consumer can afford
Point on the budget constrain line means a consumer's tade-off between two goods
Indifference curve
Indifference curves are downward sloping
A consumer need to give one thing if he or she wants to get more other good
Opportunity cost occur
Indifference curve do not cross
Consumer only equally happy in the same curve
Indifference curve cross will never happen
Higher indifference curves are preferred to lower ones
Consumer prefer more of goods than less of goods
Higher indifference curve represent larger quantity
Indifference curve are bowed inward
Bow inward because of the differences in a consumer's marginal substitution rates
Consumer is willing to trade away goods that they have many
Income effect
Occur when price change move the consumer to a higher or indifference curve
When a consumer buys less of a good when he or she income rises, the good is inferior good
When a consumer buys more of a good when he or she income rises, the good is normal good
Substitution effect
Occur when price change moves the consumer along an indifference curve
Different marginal rate of substitution