Microeconomics

The Theory of
onsumer Choice
Presented by
Prof. Dr. PGM Mujinja, BA(Hons), CIH, MPH, MA(Econ), Dr. sc. hum
SPHSS, MUHAS
Noember, 2022

The Theory of Consumer Choice 1

In this we topic, look for the
answers to these questions:
 How does the budget constraint represent the
choices a consumer can afford?
 How do indifference curves represent the
consumer’s preferences?
 What determines how a consumer divides her
resources between two goods?
 How does the theory of consumer choice explain
decisions such as how much a consumer saves,
or how much labor she supplies?
The Theory of Consumer Choice 2
 Introduction
 People face tradeoffs
 Buying more of one good leaves
less income to buy other goods.
 Working more hours means more income and
more consumption, but less leisure time.
 Reducing saving allows more consumption
today but reduces future consumption.
 This chapter explores how consumers make
choices like these.

The Theory of Consumer Choice 3

 Utility
 We consume goods and services because we get
satisfaction from their use. The level of satisfaction
derived from the good or service is measured in
what is called util, which are units of overall
satisfaction or utility gained.

 Have you ever wondered why some people spend

such a significant portion of their income on certain
goods or service?

 This has to do with their preference and the level of

satisfaction they obtained from those goods and
services.
 s
The Theory of Consumer Choice 4
 Example:
 Think about this, on a very hot day you drank
one bottle of icy cold water, how satisfied would
you feel? What if you are given a second and a
third bottle of water, would you be just as
satisfied with the second as you were with the
first, or the third as you were with the second?

 Think on it, and try to find out what would

account for the difference in feelings, if one
exists, with each additional bottle of water.

 How many would you consume before you are

satiated?
The Theory of Consumer Choice 5
 Theories of Consumer Choice
 The Cardinal Theory of Utility
This assumes that utility is a measurable
quantity, and can be measured using
cardinal numbers, e.g. 1,2,3,4 etc. and 4
utils are greater than 3 utils and so on.

 The Ordinal Theory of Utility

This approach assumes that consumers
can rank their preferences for different
goods using indifferent curves.

The Theory of Consumer Choice 6

 The Cardinal Approach
 In reality, utility or satisfaction is an abstract concept and cannot be
measured in absolute terms. However, for the basis of understanding
the concept of utility early economists assumed that it may be
measured.

 MARGINAL UTILITY:
 Marginal Utility (MU) is each additional utility gained from
consuming consecutive units of the a product over time. In our
water example, the 1st btl. of water may give you 40 utils, but
because your thirst was somewhat quenched by the 1st btl. of
water, you were only able to derive 25 utils from the 2 nd and 10 utils
from the 3rd bottle.

 Note that MU is the total satisfaction you get from each successive
bottle of water. So MU for 1st bottle is 40 utils, MU for 2nd bottle is 25
utils and the MU for the 3rd bottle is 10 utils.

The Theory of Consumer Choice 7

 Marginal Utility Vs Total Utility

 TOTAL UTILITY :

Total Utility (TU) on the other hand is the total satisfaction gained
from all units of a particular commodity consumed over a period of
time. So in our water example, TU equals 40 + 25 + 10 which
gives a total of 75 utils.

 Note here that total utility is the sum of the marginal utilities.

 In summary utility is the satisfaction derived, marginal utility is the

satisfaction (utility) of each successive unit of consumption, while total
utility is the amount of satisfaction (utility) obtained from consuming a
particular quantity of a good or service within a given time period.

The Theory of Consumer Choice 8

 Calculation of MU and TU
TUx = ∑MUx = sum of utility from each additional unit
Bottles Utility
of Water Gained
∴ TUx = 40+25+10+0=75 1 40

2 25

MU = Δ Total Utility
3 10
Δ quantity consumed
4 0
∴ MU 3rd Bottle = TU 3rd bottle − TU 2nd bottle

3 bottles – 2 bottles

= (40+25+10) – (40+25) = 10 utils

3-2
The Theory of Consumer Choice
 Law of diminishing marginal utility

• The more of a good a consumer consume, the less

marginal utility he will gain from each additional
good, to contribute to his overall satisfaction level,
ceteris paribus, over a specific period.

• The law of diminishing marginal utility states that as

a consumer consumes more and more of a specific
commodity, the utility from the successive units,
beyond a certain point, will fall with each additional
unit.

The Theory of Consumer Choice 10

 Diminishing Utility
 Note in our example above, that as more bottles of water are
consumed, the marginal utility of the additional units begins
to get lower, but the total utility continues to increase, but at a
diminishing rate.
 The diagram below represents our total utility curve.

TU is maximised

TU Diminishes

TU increases at an
increasing rate

The Theory of Consumer Choice 11

 Utility Maximization under A Budget constraint

• Consumers are faced with the dilemma of maximizing utility on their limited
income. Because of the budgetary constraint, consumers ultimately decide to
trade off price and quantity of goods.

• Each individual has a limited amount of income, however individuals prefer

more rather than less of particular goods.
• How do we reconcile this problem? We makes choices, and the
opportunity cost of making a choice for one good leaves us with less
money to buy others.

• How do we make these choices? Consumers compare the expected utility

to be derived from one additional dollar spent on one good to the utility
derived from one additional dollar spent on another good.

• In the short-run, the price of goods and income levels are fixed, so the
consumer trades-off among the possible goods that he can afford.

The Theory of Consumer Choice 12

Utility Maximization under A Budget constraint

 Since consumer spending is constrained by income, then:

 Income = P Q + P Q + P O + ….+P Q
x x y y w w z z

 While it is rational to try to equalize MU /P , MU / P , MU /P ,

x x y y w w

………. and MUz/Pz , to maximize utility gained, total spending

cannot exceed total income.

 For example, Matthew has an income of $40, and wants to buy
two goods, then he must decide how much of each good he
should buy given the prices and his income. Say he wants to buy
apples @ $2each and orange @ $4each. His budget constraint
is:
 I = P a Qa + Po Qo
 Given the above the slope of the line is 2.

 If Matthew believes that his satisfaction from orange is six times

as much as apples, then he would opt to buy more orange, as $1
spent on orange gives more satisfaction than $1 spent on apple.
The Theory of Consumer Choice 13
 I ≥ PaQa+ PoQo
Slope = Po/Pa = 2

Generally, optimizing Condition is

when:
MUx = MUy
Px Py
i.e. the marginal utility of x divided
by the price of x is equal to the
marginal utility of y divided by the
price of y; subject to PxQx + PyQy ≥
I.

When MUx > Muy ;

Px Py
then spend more on good x and less
on good y.

The Theory of Consumer Choice

 The ordinal theory of utility
Remember we said that the ordinal approach
assumes that consumers can rank their preferences
for different goods using indifferent curves.
 Indifference curves are lines drawn in a two-
dimensional space showing different
combinations of two goods from which the
consumer draws the same amount of utility and
therefore he is “indifferent” or not particular
about them.
 A consumer will allocate his expenditure in such
a manner so as to maximize his utility, while
adhering to his budget line.
The Theory of Consumer Choice
 Indifference Curves
Y The change in total utility between two
close bundles of goods is:
Δ TU = MUx* Δ Qx + MUy* Δ Qy.
MU is the rate of change of total utility with
respect to changes in the quantities of the
goods.

Along an indifference curve, ΔTU = 0, so

this equation becomes Δ Qy/Δ Qx = -
MUx/MUy.
U4
Along the same indifference
U3 curve the total utility is
constant.
U2
Maximizing utility means
U1 getting to the highest
indifference curve.
O X

The Theory of Consumer Choice

 Budget Line
A budget line is a line
Y
drawn in a two-
I/Py Income = Px .Qx + Py. Qy dimensional space
representing a
certain level of
income with which
Slope = Px/Py the consumer can
purchase various
combinations of two
goods at given
prices.
X
O I/Px
The Theory of Consumer Choice
 Example:
Consider the graph of
indifference curves below:a. Which point has the
Y
highest total utility?
D
b. How does total utility at
A
point D compare to total
U4
B utility at point E?
U3
C U2 c. Suppose there is a
E U1 consumer equilibrium at
X point B. Draw in a budget
O
line that would correspond
to an equilibrium at that
Answer:
point.
a. Point A has the highest total utility because it is on the highest indifference curve
b. Points D and E have the same total utility since they are on the same indifference
curve
The Theory of Consumer Choice

c. See the orange line drawn above

 Marginal rate of substitution
 Marginal rate of substitution is the rate at which a consumer is
willing to trade one good for another along an indifference curve
MRSxy = MUx/MUy
 In other words, it indicates the rate at which the commodities can
be substituted at the margin in such a manner that the total
satisfaction of the consumer remains unaltered.

Y
Slope = Δ Y/ Δ X
= MUx/MUy

U3

U2
U1
X
O
The Theory of Consumer Choice
  Since MUx/Px = MUy/Py; then MUx/MUy = Px/Py

 Which means that the consumer chooses consumption of the two

goods so that the MRS equals the ratio of the prices.

 So if MUx/Px > MUY/Py,, the consumer has an incentive to shift

purchases away from y and toward x.

 And if MUx/Px < MUy/Py,, the consumer has an incentive to shift

purchases away from x and toward y.

 As a result they will move toward the combination of x and y that

maximizes their welfare.

The Theory of Consumer Choice

 CRITICISMS OF UTILITY
THEORY
 Some economists claim that utility cannot be
measured objectively. Also, consumer preference
varies from person to person, therefore one cannot
predict accurately how individuals switch from one
product to another.
 There are also doubts about the assumption of
rational behaviour among consumers, particularly
in a world where consumers cannot expect to have
all the information available on the products
available in a market.
The Theory of Consumer Choice
 The Budget Constraint:
What the Consumer Can Afford
 Example:
Hurley divides his income between two goods:
fish and mangos.
 A “consumption bundle” is a particular
combination of the goods, e.g., 40 fish & 300
mangos.
 Budget constraint: the limit on the
consumption bundles that a consumer can
afford

The Theory of Consumer Choice 22

 Budget Constraint
Hurley’s income: $1200
Prices: PF = $4 per fish, PM = $1 per mango
A. If Hurley spends all his income on fish,
how many fish does he buy?
B. If Hurley spends all his income on mangos,
how many mangos does he buy?
C. If Hurley buys 100 fish, how many mangos
can he buy?
D. Plot each of the bundles from parts A – C on
a graph that measures fish on the horizontal
axis and mangos on the vertical, connect the
The Theory of Consumer Choice 23
dots.
 D.
D. Hurley’s
Hurley’s budget
budget
Quantity
of Mangos constraint
constraint shows
shows
B the
the bundles
bundles he
he can
can
A. $1200/$4 afford.
afford.
= 300 fish
C
B. $1200/$1
= 1200
mangos
C. 100 fish
cost $400,
$800 left A
buys 800
Quantity
mangos of Fish
The Theory of Consumer Choice
 The Slope of the Budget
Constraint
From C to D, Quantity
of Mangos
“rise” =
–200 mangos
“run” =
+50 fish C

Slope = – 4 D
Hurley must
give up
4 mangos
to get one fish.
Quantity
of Fish
The Theory of Consumer Choice 25
 The Slope of the Budget
Constraint
The slope of the budget constraint equals
 the rate at which Hurley
can trade mangos for fish
 the opportunity cost of fish in terms of
mangos
 the relative price of fish:

The Theory of Consumer Choice 26

 Group Work

Show what happens to Hurley’s budget

constraint if:
A. His income falls to $800.
B. The price of mangos rises to
PM = $2 per mango

The Theory of Consumer Choice 27

 Quantity A
A fall
fall in
in income
income
Now, of Mangos shifts
shifts the
the budget
budget
Hurley constraint
constraint down.
down.
can buy
$800/$4
= 200 fish
or
$800/$1
= 800
mangos
or any
combination Quantity
in between.
The Theory of Consumer Choice
of Fish
 Answers, part B
Quantity An
An increase
increase in
in the
the
Hurley of Mangos price
price of
of one
one good
good
can still buy
pivots
pivots the
the budget
budget
300 fish.
constraint
constraint inward.
inward.
But now he
can only buy
$1200/$2 =
600 mangos.
Notice:
slope is
smaller,
relative price of
fish is now only Quantity
2 mangos.
The Theory of Consumer Choice
of Fish
 Preferences: What the Consumer
Indifference curve: Wants
Quantity One of Hurley’s
shows of Mangos indifference curves
consumption
bundles that give
the consumer the
same level of B
A, B, and all other
satisfaction
bundles on I1 make A
Hurley equally happy – I1
he is indifferent
between them.
Quantity
of Fish
The Theory of Consumer Choice 30
 Four Properties of Indifference
Curves
Quantity One of Hurley’s
1. Indifference curves of Mangos indifference curves
are downward-
sloping.

Indifference curves for two

“goods” are generally B
negatively sloped –
(downward sloping).
The slope of an A
indifference curve
reflects I1
If the quantity of
fish is reduced,
the quantity of mangos Quantity
must be increased of Fish
to keep Hurley
The Theory of Consumer Choice 31
 Four Properties of Indifference
Curves
Quantity A few of Hurley’s
2. Higher indifference of Mangos indifference curves
curves are preferred
to lower ones.

Indifference curves
that are farther from D
C
the origin represent A I2
higher levels of I1
He prefers every
utility. I0
bundle on I1 (like A)
Hurley prefers every
to every bundle on I0 Quantity
bundle on I2 (like C) of Fish
(like D).
to every bundle on I1
The Theory of Consumer Choice 32
 Four Properties of Indifference
Curves
3. Indifference
Quantity Hurley’s
curves cannot of Mangos indifference curves
intersect or cross
each other
Suppose they did.
Hurley should prefer
B to C, since B has B
more of both goods.
Yet, Hurley is indifferent C A
between B and C: I1 I4
He likes C as much as A
(both are on I4).
Quantity
He likes A as much as B of Fish
(both are on I1).
The Theory of Consumer Choice 33
 Four Properties of Indifference
Curves
Quantity
4. Indifference of Mangos
curves are bowed
inward or convex
A

Hurley is willing to give 6

up more mangos for a
1
fish if he has few fish
B
(A) than if he has 2
many (B). 1 I1

Quantity
of Fish
The Theory of Consumer Choice 34
 The Marginal Rate of Substitution

Marginal rate of Quantity MRS = slope of

substitution (MRS):
of Mangos indifference curve
the rate at which a consumer
is willing to trade one good A
for another.
MRS = 6
Hurley’s MRS is the
amount of mangos he 1
would substitute for B
MRS = 2
another fish. 1 I1
MRS falls as you move
down along an Quantity
indifference curve. of Fish
The Theory of Consumer Choice 35
 One Extreme Case: Perfect
Substitutes
Perfect substitutes: two good wi
straight-line indifferen ce
curves,
constant MRS
Example: nickels & dimes
Consumer is always willing to trad

two nickels for one dime.

The Theory of Consumer Choice 36

 Another Extreme Case: Perfect
Complements
Perfect complements: two goods with
right-angle indifference curves

Example: Left shoes, right shoes

{7 left shoes, 5 right shoes}
is just as good as
{5 left shoes, 5 right shoes}

The Theory of Consumer Choice 37

 Less Extreme Cases:
Close Substitutes and Close
Complements
Quantity Indifference
Indifference Quantity Indifference
Indifference
curves of hot curves
curves for
of Pepsi curves for
for dog buns
for
close
close close
close
substitutes
substitutes complement
complement
are
are not
not very
very ss are
are very
very
bowed
bowed bowed
bowed

Quantity Quantity
of Coke of hot dogs
The Theory of Consumer Choice
 Optimization: What the Consumer
Chooses
A is the optimum: Quantity
of Mangos
The
The optimum
optimum
is
is the
the bundle
bundle
the point on the
Hurley
Hurley most most
budget constraint
1200 prefers
prefers out out of
of
that touches the
all
all the
the
highest possible
bundles
bundles he he
indifference
Hurley prefers B to B can
can afford.
afford.
curve.
A, but he cannot 600
A
afford B.
Hurley can afford C C
and D, D
but A is on a higher
indifference curve. 150 300 Quantity
of Fish
The Theory of Consumer Choice 39
 Optimization: What the Consumer
Chooses
Quantity
At the optimum, of Mangos Consumer
Consumer
slope of the optimization
optimization is
is
indifference curve another
another example
example
equals 1200 of
of “thinking
“thinking at
at
slope of the budget the
the margin.”
margin.”
constraint:
MRS = PF/PM A
600

marginal
price of fish
value of fish
(in terms of
mangos)
(in terms of 150 300 Quantity
mangos) of Fish
The Theory of Consumer Choice 40
 The Effects of an Increase in
Income
Quantity
of Mangos
An increase in
income shifts the
budget constraint
outward.
B
If both goods are A
“normal,” Hurley
buys more of
each.

Quantity
of Fish
The Theory of Consumer Choice 41
  An increase in income increases the quantity
demanded of normal goods and reduces the
quantity demanded of inferior goods.
 Suppose fish is a normal good
but mangos are an inferior good.
 Use a diagram to show the effects of
an increase in income on Hurley’s optimal
bundle of fish and mangos.

The Theory of Consumer Choice 42

 Quantity
of Mangos

If mangos
are inferior,
the new
optimum will
A
contain fewer B

mangos.

Quantity
of Fish
The Theory of Consumer Choice 43
 The Effects of a Price Change

Quantity
of Mangos
Initially,
PF = $4 1200
initial
PM = $1 optimum

Main features of a new

optimum
market include: 600
Main features of a 500
market include:
Main features of a
market include:
Main features of a 150 300 600 Quantity
market include: 350 of Fish

The Theory of Consumer Choice 44

 The Income and Substitution
A fall in the price ofEffects
fish has two effects on
Hurley’s optimal consumption of both goods.
 Income effect
A fall in PF boosts the purchasing power of
Hurley’s income, allows him to buy more
mangos and more fish.
 Substitution effect
A fall in PF makes mangos more expensive
relative to fish, causes Hurley to buy fewer
mangos & more fish.
Notice: The net effect on mangos is ambiguous.

The Theory of Consumer Choice 45

 The Income and Substitution
Effects
Initial Quantity
In
In this
this
optimum at A. of Mangos
example,
example, thethe
PF falls. net
net effect
effect on
on
mangos
mangos is is
Substitution effect: negative.
negative.
from A to B,
buy more fish and A
C
fewer mangos.
B
mbuy more of both
goods.
Quantity

of Fish
The Theory of Consumer Choice 46
The substitution effect in two
cases

Do you think the substitution effect would be

bigger for substitutes or complements?
 Draw an indifference curve for Coke and
Pepsi, and, on a separate graph, one for hot
dogs and hot dog buns.
 On each graph, show the effects of a relative
price change (keeping the consumer on the
initial indifference curve).

The Theory of Consumer Choice 47

 But
ButInthe
Inthe substitution
both graphs,
graphs, the
substitution
both effect
effect
the is
is bigger
relative
relative pricefor
price
bigger substitutes
changes
for substitutes
changes
bythan
by the
than complements.
the same amount.
complements.
same amount.
Quantity
of Pepsi Quantity of
hot dog buns

A
B B

Quantity Quantity
The Theory of Consumer Choice of Coke of hot dogs
 Deriving Hurley’s Demand Curve
for Fish
A: When PF = $4, Hurley demands 150 fish.
B: When PF = $2, Hurley demands 350 fish.
Quantity Price of
of Mangos Fish

A
$4
A
B
B
$2
DFish

150 350 Quantity 150 350 Quantity

of Fish of Fish
The Theory of Consumer Choice 49
 Application 1: Giffen Goods
 Do all goods obey the Law of Demand?
 Suppose the goods are potatoes and meat,
and potatoes are an inferior good.
 If price of potatoes rises,
 substitution effect: buy less potatoes
 income effect: buy more potatoes
 If income effect > substitution effect,
then potatoes are a Giffen good, a good for which
an increase in price raises the quantity demanded.

The Theory of Consumer Choice 50

 Application
1:
Giffen
Goods

The Theory of Consumer Choice 51

Application 2: Wages and Labor
Supply
Budget constraint
 Shows a person’s tradeoff between consumption
and leisure.
 Depends on how much time she has to divide
between leisure and working.
 The relative price of an hour of leisure is the amount
of consumption she could buy with an hour’s wages.
Indifference curve
 Shows “bundles” of consumption and leisure
that give her the same level of satisfaction.

The Theory of Consumer Choice 52

Application 2: Wages and Labor
Supply
At
At the
the optimum,
optimum,
the
the MRS
MRS between
between
leisure
leisure and
and
consumption
consumption
equals
equals thethe wage.
wage.

The Theory of Consumer Choice 53

Application 2: Wages and Labor
Supply
An increase in the wage has two effects
on the optimal quantity of labor supplied.
 Substitution effect (SE): A higher wage makes
leisure more expensive relative to consumption.
The person chooses less leisure,
i.e., increases quantity of labor supplied.
 Income effect (IE): With a higher wage,
she can afford more of both “goods.”
She chooses more leisure,
i.e., reduces quantity of labor supplied.

The Theory of Consumer Choice 54

Application 2: Wages and Labor
Supply
For
For this
this person,
person, So
So her
her labor
labor supply
supply
SE
SE >> IE
IE increases
increases with
with the
the
wage
wage

The Theory of Consumer Choice 55

Application 2: Wages and Labor
Supply
For
For this
this person,
person, So
So his
his labor
labor supply
supply falls
falls
SE
SE << IE
IE when
when thethe wage
wage rises
rises

The Theory of Consumer Choice 56

 Could This Happen in the Real
World???
Cases where the income effect on labor supply is
very strong:
 Over last 100 years, technological progress has
increased labor demand and real wages.
The average workweek fell from 6 to 5 days.
 When a person wins the lottery or receives an
inheritance, his wage is unchanged – hence no
substitution effect.
But such persons are more likely to work fewer
hours, indicating a strong income effect.

The Theory of Consumer Choice 57

 Application 3: Interest Rates
and Saving
 A person lives for two periods.
 Period 1: young, works, earns $100,000
consumption = $100,000 minus amount saved
 Period 2: old, retired
consumption = saving from Period 1
plus interest earned on saving
 The interest rate determines
the relative price of consumption when young
in terms of consumption when old.

The Theory of Consumer Choice 58

 Application 3: Interest Rates
and Saving
Budget constraint shown is for 10% interest rate.

At
At the
the optimum,
optimum,
the
the MRS
MRS between
between
current
current and
and future
future
consumption
consumption equals
equals
the
the interest
interest rate.
rate.

The Theory of Consumer Choice 59

  Suppose the interest rate rises.
 Describe the income and substitution effects on
current and future consumption, and on saving.

The Theory of Consumer Choice 60

 The interest rate rises.
Substitution effect
 Current consumption becomes more expensive
relative to future consumption.
 Current consumption falls, saving rises,
future consumption rises.
Income effect
 Can afford more consumption in both the
present and the future. Saving falls.

The Theory of Consumer Choice 61

 Application 3: Interest Rates
and Saving
In
In this
this case,
case,
SE
SE >> IEIE and
and
saving
saving rises
rises

The Theory of Consumer Choice 62

 Application 3: Interest Rates
and Saving
In
In this
this case,
case,
SE
SE << IEIE and
and
saving
saving falls
falls

The Theory of Consumer Choice 6363

 CONCLUSION:
Do People Really Think This
Way?
 People do not make spending decisions
by writing down their budget constraints and
indifference curves.
 Yet, they try to make the choices that maximize
their satisfaction given their limited resources.
 The theory in this chapter is only intended as a
metaphor for how consumers make decisions.
 It explains consumer behavior fairly well in many
situations and provides the basis for more
advanced economic analysis.
The Theory of Consumer Choice 64
SUMMARY
 A consumer’s budget constraint shows the
possible combinations of different goods she can
buy given her income and the prices of the goods.
The slope of the budget constraint equals the
relative price of the goods.
 An increase in income shifts the budget constraint
outward. A change in the price of one of the goods
pivots the budget constraint.

The Theory of Consumer Choice 65

SUMMARY…

 A consumer’s indifference curves represent her

preferences. An indifference curve shows all the
bundles that give the consumer a certain level of
happiness. The consumer prefers points on higher
indifference curves to points on lower ones.
 The slope of an indifference curve at any point is
the marginal rate of substitution – the rate at which
the consumer is willing to trade one good for the
other.
The Theory of Consumer Choice 66
SUMMARY…

 The consumer optimizes by choosing the point on

her budget constraint that lies on the highest
indifference curve. At this point, the marginal rate
of substitution equals the relative price of the two
goods.
 When the price of a good falls, the impact on the
consumer’s choices can be broken down into two
effects, an income effect and a substitution effect.

The Theory of Consumer Choice 67

SUMMARY…

 The income effect is the change in consumption

that arises because a lower price makes the
consumer better off. It is represented by a
movement from a lower indifference curve to a
higher one.
 The substitution effect is the change that arises
because a price change encourages greater
consumption of the good that has become
relatively cheaper. It is represented by a
movement along an indifference curve.
The Theory of Consumer Choice 68
SUMMARY…

 The theory of consumer choice can be applied in

many situations. It can explain why demand
curves can potentially slope upward, why higher
wages could either increase or decrease labor
supply, and why higher interest rates could either
increase or decrease saving.

The Theory of Consumer Choice 69

 References
 Law of Diminishing Marginal Utility. Accessed 27/9/2014.
 http://economicsconcepts.com/law_diminishing_marginal_utility.htm

The Theory of Consumer Choice

The Theory of Consumer Choice 71