0:05 in this podcast I'm going to talk about consumer
0:07 consumer
0:09 Theory again consumer theory is really
0:11 all about constrain
0:14 buying I'm going to introduce two topics
0:19 lines and a difference curve looks
0:21 something like
0:25 this and we plot quantity of good y on
0:26 the Y
0:36 a couple things we just need to be aware
0:37 of when we talk about consumer Theory
0:41 and one is the idea of transitive
0:44 preferences which means that if I prefer
0:46 chicken to
0:49 beans and I prefer beef to
0:52 chicken I prefer beef to beans one thing
0:54 in economics we have a hard time doing
0:57 is is actually putting numbers to things
1:00 I can say I prefer something more to
1:02 another thing I can say I prefer chicken
1:04 more than beans but it's hard to put an
1:11 that we say that more is better but
1:12 there's also the law of diminishing
1:16 marginal returns which
1:23 steak I enjoy it less with each bite of
1:26 a steak I take I enjoy the Stak less and less
1:32 we often talk about utility and by
1:35 utility I mean
1:37 mean
1:40 happiness and
1:42 satisfaction this equation is read as
1:44 utility is equal to the function of X and
1:45 and
1:49 Y utility is a function of consumption
1:51 of two products X and
1:54 Y in this case X will be
1:58 potatoes and Y will be steak I've always
1:59 had a hard time just talking about
2:01 products X and
2:12 utility so imagine you have a giant
2:15 steak a friend of yours has a giant
2:24 trade how do you trade if you have a lot
2:26 of steak then you will give up steak to
2:37 just to be clear this represents more
2:57 potato if I have a lot of steak then I'm
2:58 willing to give up steak to get some potato
3:00 potato
3:02 in fact I'm willing to give up in this
3:04 scenario I'm willing to give up a lot of
3:14 potato so in this case obviously I'm
3:16 giving up more steak and getting a
3:18 little bit of
3:21 potato on the other
3:25 hand if I don't have very much steak and
3:27 I'm down here at the lower part of the
3:29 curve then I'm willing to give up a
3:31 little bit of steak but I expect to get
3:43 potato as you move down the um curve
3:47 notice that you actually conserve or you
3:49 you can serve the the thing you have the least
4:00 of so again on good y we have steak on X
4:02 is potato and we look at slopes of
4:06 lines and that's what measures the
4:11 trade slope we call the marginal rate of
4:14 substitution it's a change in product y
4:16 divided by the change in product X which
4:19 is the slope of the line is in this case
4:21 it's the change in a quantity consumed
4:24 of stake divided by the change in
4:32 difference curves are negatively sloped
4:35 so your relationship trade between two
4:45 potatoes my budget curve it constrains
4:47 my consumption if I don't have a budget
4:49 I can consume as much as I
4:53 want so $5 per pound of potatoes let's
4:55 make that assumption let's make
4:58 assumption that is $10 per pound for
5:00 steak and my income is
5:04 $11,000 my equation looks something like
5:08 this $5 time the quantity of potatoes I
5:10 consume and $10 times the quantity of
5:13 steak I consume and all that adds up to
5:24 stake then I cross out that amount and I
5:27 have $10 times the amount of steak which
5:36 on the other hand what if I spend all my
5:46 potatoes look something like this and I
5:52 potatoes lot of
5:55 potatoes so we can plot this line if I
5:58 spend all on steak it's it's uh 100
6:01 steak all on potatoes is 200 potatoes I
6:03 can easily calculate the slope of the
6:10 one2 the equation of my budget line
6:11 Looks something like
6:21 x times the quantity of X
6:23 X
6:26 plus the price of
6:42 y m we use M uh instead of
6:46 I so we have uh income is equal to price
6:49 of x * the quantity of X plus the price
6:51 of y * the quantity of Y and now we're
6:59 y so we subtract uh the price of x * the
7:01 Quant X from both sides of the equation
7:02 which gives
7:05 us uh income minus the price of x * the
7:08 quantity of X on the left hand side and
7:09 price of Y times the quantity of Y on
7:11 the right hand
7:14 side we divide both sides by the price
7:16 of Y to isolate
7:19 y which gives us an equation like that
7:21 and eventually we
7:31 here again again price of x times the
7:34 quantity of X plus the price of y *
7:43 income now when we plot our uh equation
7:46 in the budget uh line or budget curve
7:48 this is the way our equation works the
7:50 slope of the line is the ratio of the
7:54 two prices and remember that the uh the
7:56 uh price of the goods we're looking at
8:04 and the price the slope should equal 1/2
8:12 before the slope of the line is the
8:15 ratio of the
8:18 prices the slope changes the if the price
8:28 changes so now what happens if the price
8:30 of potatoes fall
8:32 what we see is it moves like
8:36 that that means you can consume more
8:40 potatoes that's it rotates around that
8:47 potatoes what happens if the price of potatoes
8:49 potatoes
8:52 rise you see that you can buy less
8:55 potatoes and you pivot the other
9:03 what happens if the price stake changes
9:06 what we see is as the price State goes
9:14 stake that's if the price of stake goes
9:17 down on the other hand if the price of
9:18 stake goes
9:27 St now the next question I have is what
9:28 what happens if income changes in this
9:30 case if income goes
9:35 up the entire budget line shifts out
9:47 everything income goes down you can buy
9:58 everything so you see an entire shift at
10:04 income changes entire budget line shifts
10:06 income goes up budget line shifts
10:08 outward income goes down budget line shifts
10:14 inward so in the end we have constrained
10:16 consumption and we're going to draw a
10:18 lot of indifference curves that's called
10:20 a indifference map and we're going to
10:21 have a budget line and we're going to
10:23 look at what happens when we combine
10:26 these two together in our next class but
10:29 the key is going to be the slope of the
10:31 the indifference curve is going to equal
10:33 the slope of the budget line that's
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