Introduction to Consumer Choices

Read all the sections in this chapter for information on consumer choice, including utility, consumer equilibrium, consumer equilibrium demand, consumer surplus, budget constraint, and consumer equilibrium and indifference curves.

3. How Changes in Income and Prices Affect Consumption Choices

By the end of this section, you will be able to:

  • Explain how income, prices, and preferences affect consumer choices
  • Contrast the substitution effect and the income effect
  • Utilize concepts of demand to analyze consumer choices
  • Apply utility-maximizing choices to governments and businesses

Just as utility and marginal utility can be used to discuss making consumer choices along a budget constraint, these ideas can also be used to think about how consumer choices change when the budget constraint shifts in response to changes in income or price. Indeed, because the budget constraint framework can be used to analyze how quantities demanded change because of price movements, the budget constraint model can illustrate the underlying logic behind demand curves.