CHAPTER OUTLINE

I.  Calculate and graph a budget line that showsthe limits to a person’s consumption possibilities.

A. TheBudget Line

B.  AChange in the Budget

C. Changesin Prices

1.  AFall in the Price of Water

2.  ARise in the Price of Water

D. Pricesand the Slope of the Budget Line

 

n What’s New in this Edition?

Chapter 13 had been Chapter 12 in thefifth edition. It has been slightly updated from the fifth edition. The Eyeapplications include updated data.

n Where We Are

In this chapter, we uncover theconsumer’s behavior that leads to a downward-sloping demand curve. The consumermaximizes utility by allocating his or her entire budget while equating themarginal utility per dollar spent across all goods. As a result, the demandcurve reflects choices a consumer is willing to make that maximize his or herutility. The chapter concludes by investigating the paradox of value.

n Where We’ve Been

The first three sections of the bookfocused heavily on demand and supply. The demand and supply model was developedand then extended to discuss efficiency, externalities, public goods, commonresources, and government policies such as price ceilings, price floors, andtaxes.

n Where We’re Going

After thischapter, the focus turns to exploring the supply curve in greater detail.Chapter 14 looks at a firm’s production choices and its total product function.After examining the firm’s production, we examine its costs and its cost curvesin the short run and in the long run.

IN THECLASSROOM

nClass Time Needed

You can complete this chapter in approximatelytwo to three class sessions, depending on the mathematical level of your class.

           Anestimate of the time per checkpoint is:

·            13.1 ConsumptionPossibilities—20 to 30 minutes

·            13.2 Marginal Utility Theory—50to 90 minutes

·            13.3 Efficiency, Price, andValue—20 to 25 minutes

 

Lecture Launcher: Use the paradox ofvalue to start your lecture. Ask students how much they are willing to pay fora gallon of water. Of course, they’ll answer a relatively low amount. Then askthem how much they would be willing to pay for a diamond. Most students willanswer hundreds or thousands of dollars. Then ask them “Why?” Remind them thatwater is essential for life and that it makes no sense to be willing to spendso little for such a valuable item. Spark some more discussion by asking themtheir willingness to pay for water versus their willingness to pay for diamondsif they were lost in the desert. When you finish the day’s lecture, askstudents if they can explain the paradox. Reassure them this topic is difficultto understand. In fact, so difficult that until the concepts of utility andmarginal utility were discovered in the 1800s, the paradox could not beexplained.

Lecture Launcher: A major component ofconsumer demand is preferences, which vary between consumers. A good startingplace might be to have the students name some things they had bought recentlyand explain why they did so. Then find someone else who would not have made thesame purchase, and explain why. Often we see that someone else has bought somethingwe regard as silly or useless, and mentally question it thinking “isn’t itstrange what some people would rather have than money.” That the item waspurchased at all is evidence that at least at the time of purchase, the good orservice was more desirable than money

Lecture Launcher: Once you haveintroduced the idea of marginal utility, ask your students why a vendingmachine, which requires payment for each snack purchased, is used to sellsnacks while a newspaper can be sold out of a box that allows anyone to takemore than one paper. If students fail to respond using marginal utility analysis,prompt them by asking, “If snacks were sold using a newspaper style box, wouldsome people take more than they paid for?” Then ask, “Why don’t people takemore than one paper?” See if the students can discover diminishing marginalutility on their own. If not, explain why different sales techniques are used:Because the marginal utility of a paper diminishes so rapidly, there is littleconcern that people take more than one. When you have formally taughtdiminishing marginal utility, tie your lecture back into this example.

 

CHAPTER LECTURE

9.1    Consumption Possibilities

qLand Mine: Students are introduced to another curve in this chapter, thebudget line. Remind them that this line is not a demand curve or a productionpossibilities frontier. Point out the differences: A demand curve is graphed inprice/quantity space and shows how the quantity demanded of a product dependson its price; a budget line is graphed in good A/good B space and showscombinations that can be afforded; and although a PPF is also graphed in goodA/good B space, it applies to a nation as whole and shows what can be produced.However, the budget line is similar to the PPF because both show limits.

The Budget Line

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• Households have     limited budgets, which means they must choose between affordable     combinations of goods and services. A budget     line, illustrated in the figure, shows the limits to a household’s     consumption choices. The household can buy any combination of sodas and     movies that lies on or within the budget line.

A Change inthe Budget

·        When the person’s budget changes, thebudget line shifts and its slope does not change. If the budget increases, thebudget line shifts outward; if the budget decreases, the budget line shiftsinward.

qLandMine: To help students remember how the budget lineshifts when the prices of goods change, suggest they should assume they spendALL of their income on either good. For example, suppose apples are on thex-axis, and oranges are on the y-axis. Ask students, “What happens if the priceof apples increases?” Tell them to assume that they hate apples and regardlessof the price of apples, they spend their entire budget on oranges. Because theprice of oranges doesn’t change, ask how the change in the price of applesimpacts the number of oranges they can buy. Point out the y-intercept andstress the fact that this is the consumption point at which all their budget isspent on oranges. Make it clear that this point does not change when the priceof apples rises. Then turn to the x-axis and tell students that they now buyonly apples and no oranges. Discuss with them that the x-intercept shows themaximum number of apples they can buy when they spend their entire budget onapples. While pointing out the x-intercept, ask students what happens to the numberof apples they can buy when the price of apples rises. When they answer “fewerapples,” move your finger leftward along the x-axis and make a mark. Then drawthe new budget line: the y-intercept does not change while the x-interceptrotates inward, making the budget line steeper. The point of this exercise isto focus on the intercepts and not the slope. For many students, this is aneasier method of determining the change in the budget line. To complete the exercise,let the price of oranges fall and go through the same mechanics.

Changes inPrices

·        When the price of the good measuredalong the horizontal axis (movies) changes, the budget line rotates around thevertical intercept. If the price of the good falls, the budget line rotatesoutward; if the price of the good rises, the budget line rotates inward.

·        When the price of the good measuredalong the vertical axis (sodas) changes, the budget line rotates around the horizontalintercept. If the price of the good falls, the budget line rotates outward; ifthe price of the good rises, the budget line rotates inward.

Prices andthe Slope of the Budget Line

·        When the price changes, so does theslope of the budget line. If the price of a good measured on the horizontalaxis falls, the budget line becomes steeper. If the price of a good measured onthe vertical axis changes, the budget line becomes less steep.

·        A relativeprice is the price of one good in terms of another goodand equals the price of one good divided by the price of another good. Themagnitude of the slope of thebudget lineis the relative price of thegood on the horizontal axis in terms of the good on the vertical axis, or inthe diagram, the relative price of a movie in terms of sodas. A relative priceis an opportunity cost, so the relative price of a movie in terms of sodas givesthe opportunity cost of a movie in terms of sodas forgone