Presentation is loading. Please wait.

Presentation is loading. Please wait.

1 Chapter 6 theory of Consumer behavior Chapter 2 talks about market demand, but market is made of many individuals with different incomes, tastes, etc.

Similar presentations


Presentation on theme: "1 Chapter 6 theory of Consumer behavior Chapter 2 talks about market demand, but market is made of many individuals with different incomes, tastes, etc."— Presentation transcript:

1 1 Chapter 6 theory of Consumer behavior Chapter 2 talks about market demand, but market is made of many individuals with different incomes, tastes, etc. Chapter 2 talks about market demand, but market is made of many individuals with different incomes, tastes, etc. Individual consumer is assumed to be rational and wish to maximize his/her well-being. Individual consumer is assumed to be rational and wish to maximize his/her well-being.

2 2 In this chapter you will encounter: Indifference curve The marginal rate of substitution (MRS) The concept of utility The budget line The equilibrium market basket Deriving individual demand curve and market demand curve

3 3 6.1Consumer preferences and utility Complete information Preference ordering

4 4 The concept of utility Why Why people consumer? To satisfy their unlimited desire, to be satisfactory. Utility Utility indicated the level of enjoyment or preference attached by this consumer to this market baskets.

5 5 The utility Function utility Benefits consumers obtain from the goods and services they consume.

6 6 Cardinal Utility & Ordinal Utility Cardinal utility believes that utility could be measured & added (utility unit & marginal analysis); Ordinal utility holds that utility could only be ordered and cannot be measured (indifference curve).

7 7 Cardinal utility Total & Marginal Utility Total utility (TU ) refers the degree of satisfaction from the whole consumption Total utility (TU ) refers the degree of satisfaction from the whole consumption Marginal utility ( MU ) refers the additional satisfaction from one more unit of consumption Marginal utility ( MU ) refers the additional satisfaction from one more unit of consumption

8 8

9 9 Law of Diminishing Utility As more of a product is consumed, the degree of satisfaction consumers get from every additional unit is decreasing. Marginal utility (MU) is decreasing. The law of diminishing utility.

10 10 Ordinal utility Ordinal utility holds that utility cannot be measured but can be ordered according to consumers’ preferences. Different product combinations may be viewed as having same utility, And these combinations of same utility consist of one Indifference Curve (IC).

11 11 Indifference Curve 6.2 Indifference Curve Indifference Curve (IC) contains points representing market baskets among which the consumer is indifferent.

12 12 indifference curve A locus of points representing different bundles of goods and services, each of which yields the same level of total utility.

13 13 X1X1X1X1 X2X2X2X2 O I2I2I2I2 I3I3I3I3 I1I1I1I1 Indifference curve ( IC ) Increasing satisfaction

14 14 The important things of IC 1. IC is convex to the origin. 2.Every indifference curve must (?) slope downward and to the right; 3. Indifference curves cannot intersect.

15 15 Another important but not mentioned thing about IC: A consumer has many indifference curves; How do you understand this attribute?

16 16 U = f ( X 1 , X 2 ) = U 1 X1X1X1X1 X2X2X2X2 Δ X 1 =1 ΔX2ΔX2ΔX2ΔX2 O IC A B C ΔX 2 /ΔX 1

17 17 Marginal Rate of Substitution (MRS) MRS is defined as the number of units of good Y that must be given up if consumer is to receive an extra unit of good X and to maintain a constant level of satisfaction. MRS is defined as the number of units of good Y that must be given up if consumer is to receive an extra unit of good X and to maintain a constant level of satisfaction.

18 18 To calculate MRS

19 19 Not all indifference curves must slope downward. Can you name some other cases? What will the IC of substitutes & complements?

20 20 IC of substitutes X1X1X1X1 X2X2X2X2 I2I2I2I2 I1I1I1I1 O

21 21 X1X1X1X1 X2X2X2X2 I2I2I2I2 I1I1I1I1 IC of compliments

22 A Marginal Utility Interpretation of MRS ΔU=(MUxX Δ X)+(MUyX Δ Y)=O - ΔY/ ΔX=Mux/Muy MRS= Mux/Muy

23 23 The budget line Consumers want to be most satisfactory, but to be constrained by their income (budget). Budget refers to various possible combinations of products that consumers can buy when their income & products’ prices are set.

24 24 X1X1X1X1 X2X2X2X2 I / P 2 I / P 1 Budget Space The budget line

25 25 Variation of budget line Discuss P 1 & P 2 hold constant while I changes; P 1 & P 2 hold constant while I changes; I holds constant while P1&P2 change proportionately; I holds constant while P1&P2 change proportionately; I holds constant while P1 or P2 changes; I holds constant while P1 or P2 changes; I, P1&P2 increase or decrease proportionately at the same time. I, P1&P2 increase or decrease proportionately at the same time.

26 26 X1X1X1X1 X2X2X2X2 I / P 2 I / P 1 I decrease I increase “I” changes

27 27 X1X1X1X1 X2X2X2X2 I / P 2 I / P 1 P 1 increases P 1 decreases P 1 changes

28 28 Question What if P 2 changes ? And I, P 1 & P 2 change?

29 29 The Equilibrium of Market Basket Consumers want to be most satisfactory; But they are constrained by their income (budget). Consumers (rational) want to maximize their utility with limited income.

30 30 Budget line & Indifference curve I1I1I1I1 I2I2I2I2 I3I3I3I3 E Discuss: How do you understand E? Discuss: How do you understand E? B C X1X1X1X1 X2X2X2X2O

31 marginal utility interpretation of equilibrium

32 32 Consumer Equilibrium

33 33 Problem Try to find Utility Maximization consumer basket. Problem Try to find Utility Maximization consumer basket. Given the Utility function as follows, And P X =P Y =1 while Income=100 。 And P X =P Y =1 while Income=100 。 Try to find Utility Maximization consumer basket.

34

35 35 Concluding remarks Consumer basket is determined by both prices of product & his / her income. What if only prices change? What if only income changes?

36 36 If only prices change PCCPCC Price-Consumption curve Price changes → PCC XYO I2I2I2I2 I3I3I3I3 I1I1I1I1 E2E2E2E2 E3E3E3E3 E1E1E1E1 X E1 X E2 X E3

37 37 XYO I2I2I2I2 I3I3I3I3 I1I1I1I1 E2E2E2E2 E3E3E3E3 E1E1E1E1 X E1 X E2 X E3 A1A1A1A1 A2A2A2A2 A3A3A3A3 ICC If only income changes Income changes → ICC Income changes → ICC

38 38 Deriving individual demand curve A consumer’s demand curve shows how much he or her will purchase of the goods in question at various prices of this good (when other prices and the consumer’s income are held constant).

39 39 PCC Consumer Demand curve PCC to Consumer Demand Curve XYO I2I2I2I2 I3I3I3I3 I1I1I1I1 E2E2E2E2 E3E3E3E3 E1E1E1E1 X E1 X E2 X E3 X PXPXPXPX X E1 X E2 X E3 P E1 P E2 P E3 X = f ( P X )

40 40 In fact, we could get Demand Curve from Utility Function. Given income (I) and Utility function as follows, Try to get the consumer demand curve.

41 41

42 42 Summing individual consumer demand curve horizontally weget the market demand curve. Summing individual consumer demand curve horizontally we get the market demand curve. To get market demand curve

43 43 Q Q Total market P P P Q Q1Q1Q1Q1 Q2Q2Q2Q2 Q=Q A +Q B Consumer A Consumer B Q 1 +Q 2

44 44 The law of demand There is an inverse relationship between the price of a good and the quantity demanded assuming all other factors that might influence demand are held constant.

45 45 Consumer surplus Consumer Surplus (proposed by Marshell) is the excess of the price which a person would be willing to pay rather than go without the good over that which he actually does pay.


Download ppt "1 Chapter 6 theory of Consumer behavior Chapter 2 talks about market demand, but market is made of many individuals with different incomes, tastes, etc."

Similar presentations


Ads by Google