This is a complicated chapter. What did you find most confusing? What do you think about the concept of indifference curves in the context of budget constraints?
Does the concept of indifference curves add to your understanding of demand curves? The existence of prices and income clearly leads to budget constraints. Do you think about trade-offs for large purchases (ie a car payment versus rent/mortgage)? How about small purchases? Does timing matter (probably you aren’t purchasing both a car and a house at the same time)? How does the concept of indifference curves inform your thinking about purchases?
I used to hear that idea of giving up many small purchases to make single large one is very difficult. Is that because we have trouble estimating and comparing utility values between small and large purchases? I once figured out that 3 trips a week, 52 weeks a year to Starbucks added up to more than our monthly mortgage payment. And of course one extra payment a year cuts your payoff time from 30 years to 19. That’s huge, but difficult to visualize and value. (This was very useful financial advice for me. Making that extra payment – or 1/12 of the P&I extra every month – helped us become mortgage free fairly early in life. And that freed up money for other investments.)
I felt like this chapter over complicates the scenario of budgeting and consumer behavior. Now entering my 40s I have run my own budgets and managed my families finances and consumption, and this way of thinking about it overcomplicates it, while trying to simplify the topic. The examples used are a little silly in that folks are said to budget a certain amount a month to go toward deserts or eating out, and offering trade offs between breakfasts out at a diner or a fancy expensive dinner. I get the point but the examples haven’t been realistic to tradeoffs most American consumers make.
I think that using indifference curves does add to the understanding of demand curves, and does illustrate the point of budget constraints and decision trade offs. Life is more fluid than a graph can show, and more nuanced. You can make a decision based on your income, but jobs change. You can make a decision about a purchase tradeoffs, but your preferences change over time and unexpected things come up. Most of us are choosing the cost of healthcare plans, mortgages, childcare, and car payments. Most of us aren’t trying to eat pie 5 times per week (like 1 example I saw). These bigger life decisions are not always ones with real ‘choice’ either, depending on where we are choosing to live.
Dude.World 