Lecture Notes: Consumer Theory in Microeconomics

Introduction

• Apologies for the schedule change.
• Focus of this lecture: Consumer Theory in the ECO 2011 Microeconomics course.

Main Topics in Consumer Theory

1. Consumer Behavior

   • Consumers respond to available choices.
   • More choices result in higher consumer satisfaction.

2. Choice and Budget Constraints

   • Choices depend on the budget available.
   • Wealthier consumers have more flexibility in purchasing.
   • Prioritization is needed for limited budgets.

3. Consumer Preferences

   • Preferences are formed by available choices and budget constraints.
   • Constraints determine the level of demand.

Consumer Behavior

• Consumers face many choices, and preferences are determined by personal taste.
• Budget constraints limit choices despite preferences.
• Consumers aim to maximize utility, companies aim to maximize profit.

Consumer Choice

• Consumer choices depend on available options and budget.
• Example: Choosing between Android and iOS based on budget and preference.

Indifference Curves

• Show combinations of goods/services that provide the same satisfaction.
• Utility is a measure of satisfaction.
• Example: Utility from a non-functioning elevator.

Budget Constraints

• A higher budget increases choice possibilities, while a lower budget limits them.
• Example: Choosing the quantity of bread and coffee with a fixed budget.

Marginal Rate of Transformation (MRT)

• The slope of the budget line shows the trade-off between goods.
• Sacrificing one good to consume more of another.

Shifts in Budget Line

• Changes in budget or prices of goods can shift the budget line.
• Example goods: Coffee and bread, their prices, and how budget affects consumption.

Economic Changes

• Technological disruptions affect labor markets and consumer choices.
• Financial markets offer diverse investment options.

Assumptions about Consumers

• Consumers are price takers, assuming perfect information.
• Freedom of choice depends on budget and absence of barriers.

Impact on Consumer Demand

• Impact of price changes on consumer behavior.
• Income effect: Change in demand based on consumer income.

Special Cases in Consumer Preferences

• Perfect Substitutes: Example with different brands of rice.
• Perfect Complements: Example with coffee and sugar.

Types of Goods

• Normal Goods: Consumption increases with income.
• Inferior Goods: Consumption decreases as income increases.
• Giffen Goods: Demand increases with price due to necessity under special conditions.

Influences on Consumer Choices

• Substitution and income effects influence consumer decisions.
• The role of economic factors such as taxes, inflation, and market dynamics.

Conclusion

• Understanding consumer behavior and preferences is crucial for economic analysis.
• Application of this theory in various economic contexts, including labor and financial markets.

Additional Notes

• Indifference curves show combinations of goods that provide the same satisfaction.
• Budget constraints limit consumer options based on changes in income and prices.