Chapter 21 Reflections: The Theory of Consumer Choice

People Face Trade-Offs

In this chapter I learned about the trade-offs that consumers have to make when deciding on what to purchase. The theory says that "when a consumer buys more of one good, he can afford less of other goods." 

Budget constraints are limits pertaining to a person's income. You only have so much income and you have to make purchase decisions based on that income. 

Consumer preferences (represented by indifference curves) allows the consumer to choose "bundles"or combinations of goods or services that he/she wants to buy, that is, how many items of each good/service can the consumer buy with the amount of money that he has. 

Example:
Let's say I have $100 a month to spend on movies (@ $10 a movie) and  popcorn (@ $5 for a bucket of popcorn). 

#of Movies   # of Popcorn     $ Spent on Movies      $ Spent on Popcorn        Total $ Spent          
                                                                                         
10                         0                           $100                                0                        $100
9                           2                           $90                               $ 10                      $100
8                           4                           $80                               $ 20                      $100
7                           6                           $70                               $ 30                      $100
6                           8                           $60                               $ 40                      $100
5                          10                          $50                               $ 50                      $100
4                          12                          $40                               $ 60                      $100
3                          14                          $30                               $ 70                      $100
2                          16                          $20                               $ 80                      $100
1                          18                          $10                               $ 90                      $100

In this scenario I would probably choose the highlighted scenario because I would be able to buy 2 tickets and a bucket of popcorn for 4 separate times, that is if I wanted to take someone to the movies with me and share a bucket of popcorn! That would be my consumer preference using these budget constraints. 

Indifference curves show consumption "bundles" or options that give the consumer the same level of satisfaction. Below in Illustration A you'll notice that in order to get Good A (using the above scenario A is movies) and Good B (buckets of popcorn) you have to set a budget, shown here by the blue vertical line. Points a and e are outside the budget, they are more than the budget will allow. The points b and d lie on the indifference curve but d is the cheaper of the two. At point c the consumer is equally satisfied with the number of movies and the number of buckets of popcorn that can be bought. 

Illustration A. 

As people will usually want more of a good or service than less you can see where the trade-off might be. I think most of us try to live within budget constraints without even thinking about it in those terms. We work, money comes in, we want to buy things, money goes out. We can't spend more than we have and we have preferences as consumers as to what we will spend our money on. The graph might be a little confusing but if you think about it it's pretty straightforward.