1. Academic Year: 2012/2013
Instructors: Brenda Lynch and P.J. Hunt
Contact: brendalynch@ucc.ie or p.hunt@ucc.ie

2.  Consumer Preference & Indifference Maps
 The basic assumptions underlying the
theory of consumer preferences are as
follows:

3.  1) Completeness: for any two market
baskets, either the consumer prefers one to
the other or is indifferent between them;
 2) Transitivity: for any three market baskets,
if the first basket is preferred to a second
one, and the second one is preferred to a
third one, then the first basket must also be
preferred to the third one; and

4.  3) More is better: if the first basket contains
more of any good than the second basket,
the first basket is preferred to the second.

5. Indifference Curves (maps)
 With only two goods in a market, we can
represent our hypothetical consumer’s
preferences by drawing a two-dimensional
indifference curve.

6. Fig. 3.1
Clothing, units per week
0B
0A
0D
Food, units per week

7.  Every basket on the indifference curve
drawn in Figure 3.1 gives the consumer equal
satisfaction. Basket A is just as desirable as
basket B or basket D.
 However, every basket lying above the curve
in Figure 3.1 has to have more units of F,
more units of C, or more of both, and must
be better than basket A. (impossible given
current resources)

8.  Every basket lying below the curve has to
have fewer units of F or C or both, and must
be worse than A. (using less than the
available resources)

9.  Budget Constraints
 The budget constraint faced by the
consumer limits her spending to a
maximum of what her income will allow. If F
and C are the quantities of the two goods,
the budget line is;
 Pf F + Pc C = I
 Where Pf is the price per unit of food, Pc is
the price per unit of clothing, and I is the
total income available.

10.  Figure 3.3 shows a typical budget line. The
intercepts of the budget line are I/PC and
I/PF (the maximum amount of clothing or
food that can be purchased if all income is
spent on clothing or food).
 The slope of the budget line is minus the
price ratio, - Pf/ Pc. A change in income
causes a parallel shift in the budget line. A
change in prices alters the slope of the
budget line.

11. FIG. 3.3 CLOTHING
I/PC
IC0
Slope = -Pf/Pc
I/PF FOOD