Distinguishing between average product and marginal product

Chapter 5: Consumer Behavior: A Market for Anything?

those numbers up for all goods, the result must equal your income. Thus, the budget constraint would look like this for apples and oranges

In this equation, I is your income, pa is the price of an apple, qa is the quantity of apples purchased, po is the price of an orange, and qo is the quantity of oranges purchased.

The slope of the budget constraint equals the price of the good on the horizontal axis divided by the price of the good on the vertical axis.

Assume you budgeted $6.00 to purchase apples and oranges, and the price of an apple is $0.75 and the price of an orange is $0.50. In this case, your budget constraint is

One possible combination of apples and oranges you can purchase with the $6.00 are 2 apples, requiring $1.50 ($0.75×2), and 9 oranges requiring $4.50 ($0.50 ×9). Other possible combinations of apples and oranges you can purchase include 0 apples and 12 oranges, 4 apples and 6 oranges, 6 apples and 3 oranges, or 8 apples and 0 oranges.

77

Maximizing Pleasure through Consumer Choice and Constrained Optimization

Choosing among the incredible number of goods available to you isn’t difficult. Indeed, you do it all the time. You make these decisions based upon what gives you more happiness. You’ve maximized your happiness if you’re indifferent to or less satisfied with any other combination of goods as compared to what you already have.

Identifying indifference

I don’t care. You’ve probably said that phrase yourself. When I’m asked whether I want an apple or an orange, and I say “I don’t care,” it means I’m indifferent.

78 Part II: Considering Which Side You’re On in the Decision-Making Process

Indifference exists when the amount of utility you get in one situation exactly equals the amount of utility you get in another situation. So, “I don’t care” simply means I receive the same total utility or satisfaction in both situations.

If I’m asked whether I’d like 3 apples and 8 oranges, or 4 apples and 6 oranges, or 5 apples and 5 oranges, and I say “I don’t care,” I’ve indicated indifference among all three of those possibilities. Each of those combinations gives me the same total utility.

Economists graph this situation with — are you ready — an indifference curve! An indifference curve shows all possible combinations of two goods that result in the same level of total utility. Figure 5-1 graphs my indifference curve for apples and oranges. This curve is labeled U1.

Again, every point on the indifference curve U1 gives me the same level of satisfaction or utility. But as was the case with ice cream earlier in this chapter, as I eat more apples, I experience diminishing marginal utility. The result of diminishing marginal utility is I become less willing to give up oranges for an additional apple. When I start with 3 apples, I’m willing to give up 2 oranges — going from 8 to 6 oranges — in order to get one more apple, or, in the example, to get a fourth apple. In Figure 5-1, I’m moving from point A to point B on the indifference curve. Once I have 4 apples, I’m only willing to give up 1 orange to get another apple, going from 4 to 5 apples. This is represented by moving from point B to point C in Figure 5-1. I’m not as willing to give up oranges for apples because an additional apple doesn’t give me as much marginal utility. As a result of diminishing marginal utility, indifference curves are drawn convex to the origin on a graph. Convex to the origin is just a fancy term for the bowed shape the indifference curve has in Figure 5-1.

It’s possible for me to get more satisfaction. If I get 6 apples and 6 oranges, that’s better than my combination of 5 apples and 5 oranges because I’m getting both an extra apple and an extra orange. I get more utility from 6 apples and 6 oranges than I get from 5 apples and 5 oranges. Because 5 apples and 5 oranges are on my original indifference curve U1,, this new combination of apples and oranges will be on a new indifference curve — an indifference curve with higher utility or satisfaction. Thus, I move from point C on indifference curve U1 to point D on indifference curve U2 in Figure 5-2.

Indeed, I have lots of different indifference curves representing various levels of satisfaction. These indifference curves are illustrated on an indifference curve map like the one in Figure 5-2. As already mentioned, the indifference curve U2 represents combinations of apples and oranges that give me more utility than combinations on indifference curve U1. On the other hand, the indifference curve U0 illustrates combinations of apples and oranges that give me less utlity than the combinations on indifference curve U1.

Remember two things about indifference curves — every point on the same indifference curve has the same utility and higher indifference curves have higher utility.