ECON130 Week 2: Consumer theory

Hello again everyone.

This week a different lecture is coming in to discuss economics with you – he’s great and you are all going to have a wonderful time.

I cannot link your lecturer’s slides here – but he is covering similar ground to other years. As a result, here is the Wednesday and Thursday slides from last year.

This week you have focused on trying to understand our friend the rational consumer, and how we can express the following:

  1. The opportunity set they have available to them.
  2. The choice they make given that opportunity set.

Given this lets tie together some terms and think about what they mean.

  1. What is the endowment for the consumer we are considering in these lectures?
  2. Given this scarce endowment and the consumption opportunities that come from it, what is the opportunity cost associated with buying a particular item?
  3. Describe the concept(s) that suggest our consumer would choose a point on their budget line? What are some of the reasons why they wouldn’t do so, even if they met our assumptions of being rational?
  4. Why is it unlikely that some will choose one of the extreme “intercept” points for their level of consumption? How does an indifference curve relate to this, and what concept of utility is this related to?
  5. What is the law of demand and when, for a rational consumer, does it fail?

My big tip for you all is not to get too over excited about the indifference curves – instead try to understand points on the budget line, and what it means to move to a different point on a new line.

It is by doing this, with a clear understanding of what an “income” shift looks like, that you can work out income and substitution effects – which is one of the tricky parts of this week.