Topic 2: Consumer Behavior

Properties of Consumer Preferences

To model consumer behavior, we have to first know something about how consumers value the different goods and services that they purchase. Consumer tastes, or "preferences", are characterized by specific properties, such as monotonicity, convexity, and normality, which we introduce in this video.

Indifference Curves

Indifference curves graphically depict all possible combinations of the goods and services that would give a consumer the same level of utility. Understanding the shape and characteristics of these indifference curves is important for evaluating how consumers make optimal consumption decisions.

Marginal Rate of Substitution

With all the different goods and services available to us, how do consumers optimally choose how much of each good or service to purchase? A key concept underlying such decisions is the marginal rate of substitution - the rate at which consumers are willing to trade off one good for another.

Consumer Budget Constraints

When consumers make buying decisions, our choices are constrained by the money available in our budgets. As a result, some purchases are feasible, while others are infeasible with current resources.

Graphing Consumer Budget Constraints

Now that we understand how to write the equation for a consumer's budget constraint, let's learn how to graph the constraint and how to interpret some features, like the slope and intercepts.

Graphing Consumer Budget Constraints Part 2

Thought you knew everything about graphing budget constraints from the last video? Not quite. Let's examine how the budget constraint changes in response to other changes like the consumer's income or the prices of some goods.

Graphing Consumers' Optimal Decisions

Now that we understand indifference curves, the marginal rate of substitution, and budget constraints, we can bring all these concepts together to graphically analyze optimal consumer decisions.

Income Effects

How do optimal consumer decisions change in response to changes in the consumer's income? Does it depend on particular characteristics of the goods and services that consumers are buying? Let's find out!

Substitution Effect

How do optimal consumer decisions change in response to changes in the price(s) of some good(s)? Let's explore the intuition for these "substitution effects" and demonstrate how to depict these changes graphically.