Presentation on theme: "Chapter 6 theory of Consumer behavior"— Presentation transcript:
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.Individual consumer is assumed to be rational and wish to maximize his/her well-being.
2 In this chapter you will encounter: Indifference curveThe marginal rate of substitution (MRS)The concept of utilityThe budget lineThe equilibrium market basketDeriving individual demand curve and market demand curve
3 6.1Consumer preferences and utility Complete informationPreference ordering
4 The concept of utility Why people consumer? To satisfy their unlimited desire, to be satisfactory.Utility indicated the level of enjoyment or preference attached by this consumer to this market baskets.
5 utility The utility Function Benefits consumers obtain from the goods and services they consume.
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 Cardinal utility Total & Marginal Utility Total utility (TU）refers the degree of satisfaction from the whole consumptionMarginal utility（MU）refers the additional satisfaction from one more unit of consumption
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 Ordinal utilityOrdinal 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 6.2 Indifference CurveIndifference Curve (IC) contains points representing market baskets among which the consumer is indifferent.
12 indifference curve A locus of points representing different bundles of goods and services, each of which yields the same level of total utility.
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.
23 The budget lineConsumers 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.
25 Variation of budget line DiscussP1& P2 hold constant while I changes;I holds constant while P1&P2 change proportionately;I holds constant while P1 or P2 changes;I, P1&P2 increase or decrease proportionately at the same time.
26 “I” changesX2I / P2I decrease I increaseX1I / P1
33 Given the Utility function as follows, ProblemTry to find Utility Maximization consumer basket.Given the Utility function as follows,And PX=PY=1 while Income=100。Try to find Utility Maximization consumer basket.
35 Concluding remarksConsumer basket is determined by both prices of product & his / her income.What if only prices change?What if only income changes?
36 Price-Consumption curve If only prices changePrice changes → PCCXYOI2I3I1E2E3E1XE1XE2XE3PCCPrice-Consumption curve
37 If only income changes Income changes → ICC ICC Y O X I2 I3 I1 E2 E3 XE1XE2XE3A1A2A3Income changes→ ICCICC
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).
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