Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 7 Topics for Further Study
Chapter 21 of 36 The Theory of Consumer Choice
Section 4 of 26
…
Figure 2 - The Consumer's Preferences¬
The consumer's preferences are represented with indifference curves
These show the combinations of pizza and Pepsi that equally satisfy the consumer.
Because the consumer prefers more of a good, points on the higher I2 indifference curve are preferred to points on the lower I1 indifference curve
The marginal rate of substitution
· measures how much Pepsi the consumer requires to be compensated
· for a one unit reduction in pizza consumption
…
Here we consider how consumers make choices.
The budget constraint of the previous section is one piece of the analysis.
It shows the combinations of goods the consumer can afford given his income and the prices of the goods.
The consumer's choices depend on
· his budget constraint
· his preferences for the two goods
…
A consumer can have 100 pizzas and no Pepsi, but it’s likely he prefers some of each.
The consumer's preferences lead him to choose among different bundles of pizza and Pepsi.
If you offer the consumer two different bundles, he chooses the bundle that best suits his tastes.
If two bundles suit his tastes equally well, we say the consumer is indifferent between the two bundles.
We can represent consumer preferences graphically with indifference curves.
These show the bundles of consumption that make the consumer equally satisfied.
…
In Figure 2, starting with indifference curve I1 the consumer is indifferent among and equally satisfied with, combinations A, B, and C, because they are all on the same curve.
If the consumer's consumption of pizza
· is reduced from point A to point B, and then point from B to point C
· consumption of Pepsi must increase to keep him equally satisfied
The slope at any point on an indifference curve equals the rate at which the consumer is willing to substitute one good for the other.
For example, this consumer is equally satisfied getting 200 Pepsi and 10 pizza or 100 Pepsi and 40 pizza.
The rate of the trade-off is called the marginal rate of substitution.
Here, the marginal rate of substitution
· measures how much Pepsi the consumer requires to be compensated
· for a one unit reduction in pizza consumption
… …
marginal rate of substitution
genkai daitairitsu
限界代替率

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