Theory of Consumer Choice

Budget constraint

Indifference curve

Indifference curves are downward sloping

Indifference curve do not cross

Higher indifference curves are preferred to lower ones

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

Consumer only equally happy in the same curve

Indifference curve cross will never happen

A consumer need to give one thing if he or she wants to get more other good

Opportunity cost occur

Consumer prefer more of goods than less of goods

Higher indifference curve represent larger quantity

Consumption "bundles" that a consumer can afford

Point on the budget constrain line means a consumer's tade-off between two goods

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

Substitution effect

When a consumer buys more of a good when he or she income rises, the good is normal good

Occur when price change moves the consumer along an indifference curve

Different marginal rate of substitution