YoubuyyourmusiconlineandplayitonaniPodAsthepricesofa

1、You buy your music online and play it on an iPod.As the prices of a music download and an iPod have tumbled, the volume of downloads and sales of iPods have skyrocketed. Dramatic changes have occurred in the way we spend our time. The average workweek has fallen steadily from 70 hours a week in the

2、nineteenth century to 35 hours a week today. While the average workweek is now much shorter than it once was, far more people now have jobs.Why has the average workweek declined?Consumption PossibilitiesHousehold consumption choices are constrained by its income and the prices of the goods and servi

3、ces available. The budget line describes the limits to the households consumption choices.Figure 9.1 shows Lisas budget line.Divisible goods can be bought in any quantity along the budget line (gasoline, for example).Indivisible goods must be bought in whole units at the points marked (movies, for e

4、xample).Consumption PossibilitiesThe budget line is a constraint on Lisas choices.Lisa can afford any point on her budget line or inside it.Lisa cannot afford any point outside her budget line.Consumption PossibilitiesThe Budget EquationWe can describe the budget line by using a budget equation.The

5、budget equation states thatExpenditure = IncomeCall the price of soda PS, the quantity of soda QS, the price of a movie PM, the quantity of movies QM, and income Y.Lisas budget equation is:PSQS + PMQM = Y.Consumption PossibilitiesPSQS + PMQM = YDivide both sides of this equation by PS, to give:QS +

6、(PM/PS)QM = Y/PSThen subtract (PM/PS)QM from both sides of the equation to give:QS = Y/PS (PM/PS)QMY/PS is Lisas real income in terms of soda.PM/PS is the relative price of a movie in terms of soda.Consumption PossibilitiesA households real income is the income expressed as a quantity of goods the h

7、ousehold can afford to buy.Lisas real income in terms of soda is the point on her budget line where it meets the y-axis.A relative price is the price of one good divided by the price of another good.Relative price is the magnitude of the slope of the budget line.The relative price shows how many cas

8、es of soda must be forgone to see an additional movie.Consumption PossibilitiesA Change in PricesA rise in the price of the good on the x-axis decreases the affordable quantity of that good and increases the slope of the budget line.Figure 9.2(a) shows the rotation of a budget line after a change in

9、 the relative price of movies.Consumption PossibilitiesA Change in IncomeAn change in money income brings a parallel shift of the budget line.The slope of the budget line doesnt change because the relative price doesnt change.Figure 9.2(b) shows the effect of a fall in income.Consumption Possibiliti

10、esAn indifference curve is a line that shows combinations of goods among which a consumer is indifferent. Figure 9.3(a) illustrates a consumers indifference curve.At point C, Lisa sees 2 movies and drinks 6 cases of soda a month.Preferences and Indifference CurvesPreferences and Indifference CurvesL

11、isa can sort all possible combinations of goods into three groups: preferred, not preferred, and just as good as point C.An indifference curve joins all those points that Lisa says are just as good as C.G is such a point. Lisa is indifferent between point C and point G.All the points above the indif

12、ference curve are preferred to the points on the curve.And all the points on the indifference curve are preferred to the points below the curve.Preferences and Indifference CurvesA preference map is series of indifference curves.Call the indifference curve that weve just seen I1.I0 is an indifferenc

13、e curve below I1. Lisa prefers any point on I1 to any point on I0. Preferences and Indifference CurvesI2 is an indifference curve above I1.Lisa prefers any point on I2 to any point on I1 . For example, Lisa prefers point J to either point C or point G.Preferences and Indifference CurvesMarginal Rate

14、 of SubstitutionThe marginal rate of substitution, (MRS) measures the rate at which a person is willing to give up good y to get an additional unit of good x while at the same time remain indifferent (remain on the same indifference curve).The magnitude of the slope of the indifference curve measure

15、s the marginal rate of substitution.Preferences and Indifference Curves If the indifference curve is relatively steep, the MRS is high.In this case, the person is willing to give up a large quantity of y to get a bit more x. If the indifference curve is relatively flat, the MRS is low. In this case,

16、 the person is willing to give up a small quantity of y to get more x. Preferences and Indifference CurvesA diminishing marginal rate of substitution is the key assumption of consumer theory.A diminishing marginal rate of substitution is a general tendency for a person to be willing to give up less

17、of good y to get one more unit of good x, while at the same time remain indifferent as the quantity of good x increases.Preferences and Indifference CurvesFigure 9.4 shows the diminishing MRS of movies for soda.At point C, Lisa is willing to give up 2 cases of soda to see one more movieher MRS is 2.

18、At point G, Lisa is willing to give up 1/2 case of soda to see one more movieher MRS is 1/2.Preferences and Indifference CurvesDegree of SubstitutabilityThe shape of the indifference curves reveals the degree of substitutability between two goods.Figure 9.5 shows the indifference curves for ordinary

19、 goods, perfects substitutes, and perfect complements.Preferences and Indifference CurvesPredicting Consumer ChoicesBest Affordable ChoiceThe consumers best affordable choice isOn the budget lineOn the highest attainable indifference curveHas a marginal rate of substitution between the two goods equ

20、al to the relative price of the two goodsHere, the best affordable point is C.Lisa can afford to consume more soda and see fewer movies at point F.And she can afford to see more movies and consume less soda at point H.But she is indifferent between F, I, and H and she prefers C to I.Predicting Consu

21、mer ChoicesAt point F, Lisas MRS is greater than the relative price.At point H, Lisas MRS is less than the relative price.At point C, Lisas MRS is equal to the relative price.Predicting Consumer ChoicesPredicting A Change in PriceThe effect of a change in the price of a good on the quantity of the g

22、ood consumed is called the price effect.Figure 9.7 illustrates the price effect and shows how the consumers demand curve is generated.Initially, the price of a movie is $8 and Lisa consumes at point C in part (a) and at point A in part (b).The price of a movie then falls to $4.The budget line rotate

23、s outward.Lisas best affordable point is now J in part (a).In part (b), Lisa moves to point B, which is a movement along her demand curve for movies.Predicting A Change in IncomeThe effect of a change in income on the quantity of a good consumed is called the income effect.Figure 9.8 illustrates the

24、 effect of a decrease in Lisas income.Initially, Lisa consumes at point J in part (a) and at point B on demand curve D0 in part (b).Predicting Lisas income decreases and her budget line shifts leftward in part (a).Her new best affordable point is K in part (a).Her demand for movies decreases, shown

25、by a leftward shift of her demand curve for movies in part (b).Predicting Predicting Consumer ChoicesSubstitution Effect and Income EffectFor a normal good, a fall in price always increases the quantity consumed.We can prove this assertion by dividing the price effect in two parts: Substitution effe

26、ct Income effectInitially, Lisa has an income of $40, the price of a movie is $8, and she consumes at point C.Lisas best affordable point is then J.The move from point C to point J is the price effect.The price of a movie falls from $8 to $4 and her budget line rotates outward.Predicting Consumer Ch

27、oicesWere going to break the move from point C to point J into two parts.The first part is the substitution effect and the second is the income effect.Predicting Consumer ChoicesSubstitution EffectThe substitution effect is the effect of a change in price on the quantity bought when the consumer rem

28、ains on the same indifferent curve.Predicting Consumer ChoicesTo isolate the substitution effect, we give Lisa a hypothetical pay cut.Lisa is now back on her original indifference curve but with a lower price of movies and her best affordable point is K.The move from C to K is the substitution effec

29、t.Predicting Consumer ChoicesThe direction of the substitution effect never varies: When the relative price falls, the consumer always substitutes more of that good for other goods. The substitution effect is the first reason why the demand curve slopes downward.Predicting Consumer ChoicesIncome Eff

30、ectTo isolate the income effect, we reverse the hypothetical pay cut and restore Lisas income to its original level (its actual level).Lisa is now back on indifference curve I2 and her best affordable point is J.The move from K to J is the income effect.Predicting Consumer ChoicesFor Lisa, movies ar

31、e a normal good.With more income to spend, she sees more moviesthe income effect is positive.For a normal good, the income effect reinforces the substitution effect and is the second reason why the demand curve slopes downward.Predicting Consumer ChoicesInferior GoodsFor an inferior good, when incom

32、e increases, the quantity bought decreases.The income effect is negative and works against the substitution effect.So long as the substitution effect dominates, the demand curve still slopes downward.Predicting Consumer ChoicesIf the negative income effect is stronger than the substitution effect, a

33、 lower price for inferior goods brings a decrease in the quantity demandedthe demand curve slopes upward! (Giffin good)This case does not appear to occur in the real world.Predicting Consumer ChoicesThe model of consumer choice can be used to study the allocation of time between work and leisure. Th

34、e two “goods” are leisure and incomewhere income represents all other goods.Lisa buys leisure by not supplying labor and by forgoing income.So the “price” of leisure is the wage rate forgone.Work-Leisure ChoicesThe Labor Supply CurveBy changing the wage rate, we can find a persons labor supply curve.An increase in the wage rate makes leisure relatively more expensive (higher opportunity cost to not working) andhas a substitution effect toward less le