In this firstly we would talk about one of the Ten Principles from Chapter 1: People Face Tradeoffs
a. Tradeoff is a situation that involves losing one quality or aspect of something in return for gaining another quality or aspect.
b. Example like we can say Working more hours in a day means more income and more consumption, but less relaxation time.
c. Reducing saving allows more consumption today but reduces future consumption.
This chapter explores how consumers make choices like these
2. MEANING OF THE THEORY OF CONSUMER CHOICE: In this we discussed about how consumer’s makes their choice according to their income, price and substitution effect of the goods and services available.
3. THE BUDGET CONSTRINTS
The …show more content…
◉Hurley divides his income between two goods: fish and mango.
Cconsumption bundles: a combination of goods or services that a consumer typically buys together. A combination of goods or services that a consumer typically buys together
The method of the budget constraint equals
• The rate at which Hurley can trade mangos for fish
• The opportunity cost of fish in terms of mangos
The relative price of fish:
• PRICE OF FISH / PRICE OF MANGOES =$4/$1 = 4 Mangoes per fish
• How Changes in Income Affect the Consumer’s Choices
• The change in consumption that resulting when price change moves the consumer to a higher or lower indifference curve.
• The effect of a change in income on the quantity of a goods consumed is called the income effect.
• So, The consumer is able to choose a better combination of goods on a higher indifference curve.
• Now, in this figure, Initially,
• PF = $4
• PM = $1
• So, the effect of price change will be,
• PF falls to $2
• budget constraint rotates outward,
• Hurley buys more fish