KINH TẾ VI MÔ Chapter 4 for student

CHAPTER 4THEORY ON CONSUMER’S BEHAVIOR Content Theory on consumer’s utility The principle of diminishing marginal utility Consumer’s surplus Consumer’s preferences Budget constraint

CHAPTER 4

THEORY ON CONSUMER’S BEHAVIOR

Content

Theory on consumer’s utility

The principle of diminishing marginal utility

Consumer’s surplus

Consumer’s preferences

Budget constraint

Utility maximizing choice

I Theory on consumer’s utility

1 Some definitions

1.1 Utility (U)

- The benefit or satisfaction that a person gets

from the consumption of a good or service

- An abstract concept

- Unit – free

- Subjectivity (depends on consumer’s

perception)

I Theory on consumer’s utility

1 Some definitions

1.2 Total utility (TU)

- The total benefit or satisfaction that a person

gets from the consumption of goods and

services

- Depends on the person’s level of consumption

– more consumption generally gives more total

utility

I Theory on consumer’s utility

1 Some definitions

1.3 Marginal utility (MU)

- The change in total utility resulting from a one-unit

increase in the quantity of a good consumed

I Theory on consumer’s utility

2 The principle of diminishing marginal

utility

- In a certain time period, continuous consumption

will tend to the increase in total utility but a

decrease in marginal utility

* Application

I Theory on consumer’s utility

3 Consumer’s surplus (CS)

- The difference between

the market price and the

price buyer is willing to

pay

- The area below demand

curve and above the

market price line

P

Q

P*

CS

II Theory on consumer’s choice

1 Consumer’s preferences

+ Preferences do not depend on good’s price or income

+ People can sort all the possible combinations of goods

they might consume into 3 groups: preferred, not

preferred and indifferent

+ Consumers prefer more to less

+ Consumer’s preference is transitivity

II Theory on consumer’s choice

1 Consumer’s preferences

A B

II Theory on consumer’s choice

1 Consumer’s

preferences

Indifference curve:

shows the various

combinations of consumption

quantities that lead to the

same level of well-being or

I 2

Better A

B C

Movie

Food

II Theory on consumer’s choice

1 Consumer’s preferences

Indifference curve’s characteristics

- Downward sloping, the closer to the right

hand-side, the higher utility consumer can gain

- Never intersect

− ∆ X.MUx + ∆ Y.MUy = 0

- → -MUx / MUy = ∆ Y / ∆ X

- → -MUx / MUy : the slope of Indifference curve =

The marginal rate of substitution (MRS)

II Theory on consumer’s choice

1 Consumer’s preferences

A

B C D

Y

II Theory on consumer’s choice

MRS reveals consumer’s preference toward good

and service

Y

X

Y

X

II Theory on consumer’s choice

*Special indifference curve

Perfect substitute goods

II Theory on consumer’s choice

*Special indifference

curve

Perfect Complement goods

II Theory on consumer’s choice

2 Budget constraint

- Budget line (BL) : shows the various combinations of

consumption that consumer can get from the available

income

I=P X Q X +P Y Q Y

=> Q Y = I/P Y – (P X /P Y ).Q X

=> P X /P Y : the slope of budget

constraint or price line

Area C: can not afford

A B

Movie (Y)

C

II Theory on consumer’s choice

2 Budget constraint

- I, P X = const, P Y changes

P Y decreases:

P Y increases: BL 1

Y

X

II Theory on consumer’s choice

2 Budget constraint

- I, P Y = const, P X changes

P X decreases:

P X increases:

BL 1 Y

X

II Theory on consumer’s choice

2 Budget constraint

- P X , P Y = const, I changes

I increases:

I decreases:

BL 1 Y

X

II Theory on consumer’s choice

3 Optimal consumption combination

I

I 3 A

B

C

D Y

II Theory on consumer’s choice

3 Utility maximizing choice

- At point C, the indifference curve’ slope is equal to

the budget line’s slope

- In case of many goods and services:

Chapter 4: Review

A consumer decides to spend his income of

200$ on X and Y.

a PX = 4$, PY= 2$ Draw this consumer’s budget line

b Due to the decrease in quantity supplied, Y’s price goes

up to 4$ Draw new budget line

c There is a promotion from the seller Buying 20 units of Y

at price of 2$, consumer will get 10 units more free of

charge This is applied on the first 20 units of Y only

The following units are still applied the price of 2$

(except the bonus) Draw new budget line