Page 453 - The Principle of Economics

THE THEORY OF CONSUMER CHOICE
When you walk into a store, you are confronted with thousands of goods that you might buy. Of course, because your financial resources are limited, you cannot buy everything that you want. You therefore consider the prices of the various goods being offered for sale and buy a bundle of goods that, given your resources, best suits your needs and desires.
In this chapter we develop the theory that describes how consumers make de- cisions about what to buy. So far throughout this book, we have summarized con- sumers’ decisions with the demand curve. As we discussed in Chapters 4 through 7, the demand curve for a good reflects consumers’ willingness to pay for it. When the price of a good rises, consumers are willing to pay for fewer units, so the quan- tity demanded falls. We now look more deeply at the decisions that lie behind the demand curve. The theory of consumer choice presented in this chapter provides
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IN THIS CHAPTER YOU WILL . . .
See how a budget constraint represents the choices a consumer can afford
Learn how indifference curves can be used to represent a consumer’s preferences
Analyze how a consumer’s optimal choices are determined
See how a consumer responds to changes in income and changes
in prices
Decompose the impact of a price change into an income effect and a substitution effect
Apply the theory of consumer choice to four questions about household behavior