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ch 5

economic chapter preferences

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6 views

ch 5

economic chapter preferences

Uploaded by

sultanameer008
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 13

CHOICE

Chapter 5
People choose the best bundle they can
afford.
• Consumers choose the most preferred bundle from their
budget sets.
• More is preferred to less
• The budget line touches the possible high curve.
• At this choice, the indifference curve is tangent to the
budget line.
• Slope of the Indifference curve and the budget line at
tangent point should be the same.
Optimal choice. The optimal consumption position is where the indifference
curve is tangent to the budget line.
Demand Curve in Oligopoly.
• In an oligopolistic market, the kinked demand curve hypothesis states
that the firm faces a demand curve with a kink at the prevailing price level.
The curve is more elastic below/above the kink and less elastic above/below
it. This means that the response to a price increase is less than the
response to a price decrease.
• Demand is less elastic for price decrease but more elastic for price increase.
Kinky Tastes
Boundary Optimum
More than One Tangency
Quantity Demanded

• If exchange ratio of good 2 to good 1 is not the same as the ratio


of prices of good 1 and 2. consumer should try to reach that
quantity exchange rate where the ratio is same as the price of
both goods.
• This will confirm that optimal level is where the slopes of both
indifference curve and budget line are the same.
• The optimal choice of goods 1 and 2 at some set of prices and
income is called the consumer’s demanded bundle.
• Demand functions as depending on both prices and income:
x1(p1, p2,m) and x2(p1, p2,m).
Optimal choice with Perfect Substitute continue..
Optimal choice with Perfect
Substitute

• If price of good 1 is lower than price of good 2 the consumer will buy as
many of Good 1 as his income (m) allows.
• In case price of both good 1 and good 2 are equal the combination of
both will be in between 0 and m/p1
• If price of good 1 is more than price of good 2 the consumer will spend
all his income (m) on good 2.
Optimal choice with Perfect
Complements
Optimal choice with Perfect Complements

The optimal level will be if consumer is spending whole money on same


units of good 1 and good 2 and thus it is like the price of both goods
combinedly determine the units of both
Discrete goods

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