The theory of
consumer choice
Chapter 21
Copyright © 2004 by South-Western,a division of Thomson Learning.
Chapter 21 the theory of
consumer choice

In this chapter you will
 see how a budget constraint represents
the choice a consumer can afford
 learn how indifference curves can be
used to represent a consumer’s
preference
 analyze how a consumer’s optimal
choices are determined
Key concepts
Budget constraint
Perfect
substitution
Indifference
curve
Perfect
complements
Marginal
rate of
substitution
Normal good
Inferior good
Income
effect
Substitution
effect
Giffen good
 See how a consumer responds to
changes in income and changes in
prices
 decompose the impact of a price
change in an income effect and a
substitution effect
 apply the theory of consumer choice
to four questions about household
behavior
back
 Indifference curve
 a curve that shows
consumption bundles that
give the consumer the same
level of satisfaction
back
Budget constraint
 the limit on
the
consumption
bundles that a
consumer can
afford
back
Marginal rate of substitution
 The rate at
which a
consumer is
willing to trade
one good for
another
back
Perfect substitutes
 Two goods
with straightline
indifference
curves
back
Perfect complements
 Two goods
with rightangle
indifference
curves
back
Normal good
 A good for
which an
increase in
income
raises the
quantity
demanded
back
Inferior good
 A good for
which an
increase
reduces the
quantity
demanded
back
Income effect
 The change in
consumption that
results when a
price change
moves the
consumer to a
higher or lower
indifference curve
back
Substitution effect
 The change in
consumption that
results when a price
change moves the
consumer along a
given indifference
curve to a point with a
new marginal rate of
substitution
back
Giffen food
 A good for
which an
increase in
the price
raises the
quantity
demanded
back
结 束
谢 谢！！