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ECON101: Principles of Microeconomics

Unit 4: The Consumer   This unit will focus on the individual consumer and the characteristics that compel a consumer (to choose) to spend income on goods and services.  The consumer experiences utility – a measure of satisfaction – with every purchase he/she makes, and economists measure that utility in order to find a consumer’s optimal rate of consumption.  The Theory of Demand is derived from the Theory of Consumer Behavior presented in this section.  An individual's demand function can be explained by two approaches that help illustrate personal preferences: Utility Analysis and Indifference Analysis.  We will explore these concepts more fully in this unit.

Unit 4 Time Advisory
This unit should take approximately 14.25 hours to complete.

☐    Subunit 4.1: 4 hours

☐    Subunit 4.2: 4.5 hours

☐    Activity: 2 hours

☐    Assessments: 3 hours

☐    Unit Review: 0.75 hours

Unit4 Learning Outcomes
Upon successful completion of this unit, the student will be able to: - Demonstrate an ability to recognize the basic tenets of consumer theory through two alternate approaches: the utility analysis and the indifference analysis. - Correlate the derivation of the theory of demand to the theory of consumer behavior.

4.1 The Rational Consumer   - Lecture: State University of New York at Oswego: Professor John Kane’s Lecture Notes on ECON 101: “Chapter 7: Consumer Choice” Link: State University of New York at Oswego: Professor John Kane’s Lecture Notes on ECON 101: “Chapter 7: Consumer Choice” (HTML)

 Also available in:  
 [Flash](http://economic.oswego.edu/eco101/chapter7.htm)  
 [PPT](http://economic.oswego.edu/eco101/chap7.ppt)  

 Instructions: Please view this lecture and read the accompanying
lecture notes.  

 Reading this chapter should take approximately 30 minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.
  • Reading: Principles of Microeconomics: “Chapter 7, Sections 1 and 2” Link:  Principles of Microeconomics: “Chapter 7, Sections 1 and 2” (PDF)

    Instructions: Read the first two sections in Principles of Microeconomics including the Introduction, “Analysis of Consumer Choice”.  Please take a moment to read through the stated learning outcomes for this chapter of the text, which you can find at the beginning of each section.  These should be your goals as you read through the chapter.  This reading covers sections 4.1.1-4.1.5.

    Reading these sections should take approximately 1 hour and 30 minutes.

    Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

  • Guest Lecture: YouTube: TED Talks: “Sheena Iyengar on the Art of Choosing” Link: YouTube: TED Talks: “Sheena Iyengar on the Art of Choosing” (YouTube)

    Instructions: This is an optional lecture and not a requirement of the course.  Please listen to this guest lecture in which the speaker talks about her ground-breaking research on how people make choices and explains attitudes towards their decisions.

    Watching this lecture should take approximately 30 minutes.

    Terms of Use: This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License.  It is attributed to TED and the original version can be found here.

4.1.1 Marginal Utility, Budget Constraints and Utility Maximization   4.1.2 Deriving the Individual Demand Curve   4.1.3 Deriving the Market Demand Curve   4.1.4 The Income Effect and The Substitution Effect   4.1.5 Normal Goods and Inferior Goods   - Reading: Boise State University: R. Larry Reynolds' PowerPoint Modules for Principles of Microeconomics: “Chapter 9: Consumer Behavior” Link: Boise State University: R. Larry Reynolds’ Principles of Microeconomics: “Chapter 9: Consumer Behavior” (PDF)

 Instructions: This is an optional reading.  You can read this
chapter for a lucid graphical exposition of Utility Analysis.  

 Reading this section should take approximately 1 hour.  

 Terms of Use: The linked material above has been reposted by the
kind permission of R. Larry Reynolds of Boise State University, and
can be viewed in its original form
[here](http://web1.boisestate.edu/econ/lreynol/web/).  Please note
that this material is under copyright and cannot be reproduced in
any capacity without explicit permission from the copyright holder.

4.2 Consumer Preferences and Consumer Choice   - Reading: Principles of Microeconomics: “Chapter 7, Section 3: Indifference Curve Analysis: An Alternative Approach to Understanding Consumer Choice” Link: Principles of Microeconomics: “Chapter 7, Section 3: Indifference Curve Analysis: An Alternative Approach to Understanding Consumer Choice” (PDF)

 Instructions: Read this section to learn about “indifference
analysis.”  

 Reading this section should take approximately 1 hour.  

 Terms of Use: The text was adapted by The Saylor Foundation under a
[Creative Commons-Attribution-NonCommercial-ShareAlike 3.0
License](http://creativecommons.org/licenses/by-nc-sa/3.0/) without
attribution as requested by the work's original creator or licensee.
  • Reading: Bookboon.com: Krister Ehlester’s Essentials of Microeconomics: “Chapter 3: Consumer Theory” Link: Bookboon.com: Krister Ehlester’s Essentials of Microeconomics“Chapter 3: Consumer Theory” (PDF)

    Instructions: When you click the link above, you will be directed to a page from which you can download the entire book as a PDF.  Scroll down to “Chapter 3: Consumer Theory” on page 21.  This reading will cover subunits 4.2.1-4.2.2.

    Reading this chapter should take approximately 30 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

4.2.1 Consumer Theory   4.2.1.1 Budget Lines and Marginal Rate of Transformation   4.2.1.2 Indifference Curves   4.2.1.3 Marginal Rate of Substitution   4.2.1.4 Indifference Curve for Substitutes and Complements   - Lecture: Khan Academy’s “Equalizing Marginal Utility per Dollar Spent” Link: Khan Academy’s “Equalizing Marginal Utility per Dollar Spent” (YouTube)

 Instructions: Please watch the entire lecture, which is about
equalizing marginal utility per dollar spent.  

 Watching this lecture should take approximately 10 minutes.  

 Terms of Use: This video is licensed under a [Creative Commons
Attribution-NonCommercial-ShareAlike License 3.0](http://creativecommons.org/licenses/by-nc-sa/3.0/us/deed.en_CA).
 It is attributed to the Khan Academy.

4.2.2 Utility Maximization   Note: The Optimal Consumer choice in the Indifference Curve Analysis is determined by the “Tangency Condition” between the MRT and the MRS.

4.2.3 Demand   - Reading: Bookboon.com: Krister Ehlester’s Essentials of Microeconomics: “Chapter 4: Demand” Link: Bookboon.com: Krister Ehlester’s Essentials of Microeconomics“Chapter 4: Demand” (PDF)

 Instructions: When you click the link above, you will be directed
to a page from which you can download the entire book as a PDF. 
Scroll down to “Chapter 4: Demand” on page 34 and read the chapter
in its entirety.  

 Reading this chapter should take approximately 30 minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.

4.2.3.1 Individual Demand and Engel Curve   4.2.3.2 Market Demand   4.2.4 Elasticity   - Reading: Bookboon.com: Krister Ehlester’s Essentials of Microeconomics: “Chapter 5: Elasticity” Link: Bookboon.com: Krister Ehlester’s Essentials of Microeconomics“Chapter 5: Elasticity” (PDF)

 Instructions: When you click the link above, you will be directed
to a page from which you can download the entire book as a PDF. 
Scroll down to “Chapter 5: Elasticity” on page 38, and read the
chapter in its entirety.  

 Reading this article should take approximately 30 minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.

4.2.4.1 Price Elasticity   4.2.4.2 Income Elasticity   4.2.4.3 Cross Price Elasticity   - Activity: Dr. Sanjay Paul’s “Gimme Interaction! Utility Maximization in a Nutshell” Link: Dr. Sanjay Paul’s “Gimme Interaction! Utility Maximization in a Nutshell” (HTML)

 Instructions: Please make use of these three interactive online
exercise sets to better understand the concepts in Utility Theory. 
You will need a paper and pen to practice sketching the graphs.  The
first two exercises will enable you to draw the Budget Constraint
(BC) and Indifference Curves (IC) based on the values of the
parameters you have chosen.  Change the values of the original
parameters to see how the BC and IC also change.  As you go along,
ask why these shifts might be occurring.  In the last exercise, you
will combine the BC and IC to determine optimization.  Please ensure
you answer the questions at the end of each exercise.  

 Completing this activity should take approximately 2 hours.  

 *Note: These interactive exercises were prepared and presented by
Dr. Sanjay Paul for the Midwest Conference on Student Learning in
Economics: Innovation, Assessment and Classroom Research in Akron,
Ohio on November 7, 2003.*  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.
  • Assessment: Econ100’s “Utility and Demand Quiz: Chapter 8” and “Possibilities, Preferences and Choices Quiz: Chapter 9” Link: Econ100’s “Utility and Demand Quiz: Chapter 8” and “Possibilities, Preferences and Choices Quiz: Chapter 9” (HTML)

    Instructions: Please follow the link to get to the main page of Econ100.  Click on the “Quiz” tab on the left hand side menu and then go to Chapters 8 and 9 to take the quizzes.

    Completing this assessment should take approximately 3 hours.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

End of Unit 4 Review   - Reading: MIT OpenCourseWare: “Principles of Economics Lecture Notes D5-D7” Link: MIT OpenCourseWare: “Principles of Economics Lecture Notes D5” (PDF), “Principles of Economics Lecture Notes D6” (PDF), and “Principles of Economics Lecture Notes D7” (PDF)

 Instructions: These are optional readings.  You may go through
these notes if you wish to review topics covered in this unit in a
more mathematical way by clicking on the links above.  

 Reading these notes should take approximately 1 hour and 30
minutes.  

 Terms of Use: The articles above are released under a [Creative
Commons Attribution-NonCommercial-Share-Alike License
3.0](http://creativecommons.org/licenses/by-nc-sa/3.0/).  You can
find the original MIT version of this article
[here](http://ocw.mit.edu/courses/economics/14-01-principles-of-microeconomics-fall-2007/lecture-notes/).