Consumer Theory I

Indifference curves and demand curves

An introduction to the basic concepts underlying the behaviour of the consumer. We shall look at consumer preferences and the axioms governing these preferences, thereby examining the consumer's indifference curves. Given these and the consumer's budget, it is possible to analyse the consumer's demand for various goods or products. In particular, we shall be interested in how demand varies with the price of the good, prices of other goods, and the consumer's income. This will demonstrate that there are several categories of goods which can be distinguished by how demand for that good varies with price. More specifically, the 'income' and 'substitution' effects will allow us to differentiate between these goods.

Basic reading
  • Varian, Intermediate Microeconomics (5th ed.) chs. 2-6, 8
  • Katz & Rosen, Microeconomics (3rd ed.) chs. 2-4
  • Perloff, Microeconomics (2nd ed.) chs. 4, 5

Further reading
  • Varian, Microeconomic Analysis (3rd ed.)
  • Deaton & Muellbauer, Economics and Consumer Behaviour

  1. How can one explain the shape of indifference curves? If the price of one good falls will the demand for that good always rise?
  2. Draw indifference curves for (a) perfect substitutes, and (b) perfect complements. In each case, illustrate the effects of a price change, and draw the demand curve for one of the goods.
  3. Illustrate using indifference curve analysis:
    1. the difference between substitute and complementary goods;
    2. the differences between inferior, normal, and luxury goods;
    3. the effect of a price change on the demand for an inferior good and on the demand for a Giffen good ;
    4. the case where there are no income effects in the demand for one good.