CONSUMER

CHOICE
BY Letsoalo T.E
 CONSUMER CHOICE
• Given consumer preference and budget constraints we can now
determine the consumers choice.
• We assume that a consumer seek to maximise satisfaction given
the limited budget available to them.
The market basket must satisfy two conditions;
It must be located on the budget line
It must give the consumer the most preferred combination of
goods and services
3.3 CONSUMER CHOICE
The maximizing market basket must satisfy two conditions:
1. It must be located on the budget line.
2. It must give the consumer the most preferred combination of
goods and services.
Figure 3.13

Maximizing Consumer Satisfaction

A consumer maximizes satisfaction

by choosing market basket A. At
this point, the budget line and
indifference curve U2 are tangent.
No higher level of satisfaction (e.g.,
market basket D) can be attained.
At A, the point of maximization, the
MRS between the two goods equals
the price ratio. At B, however,
because the MRS [− (−10/10) = 1]
is greater than the price ratio (1/2),
satisfaction is not maximized.
 CONSUMER CHOICE
• Three indiference curve describe a consumer`s
preferences for food and clothing.
• The outer-most U3 yields the greatest amount of
satisfaction, followed by U2
• Point B, on U1 is not the most prefered choice because a
relocation of income in which more is spent on food and
led on clothing can increase the consumers satisfaction
 CONSUMER CHOICE
• By moving to point A, the consumer spends the same
amount of money and achieves the increased level of
satisfaction associated with U2
• Market basket D, on U3achieve a higher level of
satisfaction but cannot be purchased with the available
income.
• Therefore, A maximises the consumer satisfaction.
• Point A is the point of tangency between U2 and the
budget line
 CONSUMER CHOICE
• At A, the slope of the budget line is exactly equal to the
slope of the indiference curve.
• Satisfaction is maximised at MRS= -Pf/Pc
• Satisfaction is maximised when the MRS(of F to C) =
Prices ratio(of F to C)
 CONSUMER CHOICE
MRS = Pf/Pc
 Above equation illustrates the kinds of optimization that
arise in economics.
 In this instance, satisfaction is maximised when the
marginal beneft ( the beneft associated with the
consumption of one additional food) Is equal to the
marginal cost (the cost of the additional unit of food.
 Marginal Beneft is measured by MRS and Marginal Cost
is measured by the magnitude of the slope of the budget
line
 CONSUMER CHOICE
• If the MRS is less or greater than the price ratio, the
consumer`s satisfaction has not been maximised.