The Theories of Consumer Behavior MICROECONOMICS Chapter 3 ©KieuMinh, FTU Overview Theories of consumer behavior Explanation of how consumers allocate income to purchase different goods
Trang 1The Theories of Consumer Behavior
MICROECONOMICS Chapter 3
©KieuMinh, FTU
Overview
Theories of consumer behavior
Explanation of how consumers allocate income to purchase different goods and services (market basket)
Utility Theory
Theory of Consumer Choice
©KieuMinh, FTU
©KieuMinh, FTU
1 Utility Chapter 3
Utility- U
gets from consuming a given bundle of goods or service (market basket)
A market basket is a collection of one or more commodities
a numerical indicator of a person’s satisfaction
If one item is preferred to some alternative, the utility from the item is greater than the alternative.
Actual unit of measurement for utility is not important (ordinal, not cardinal, ranking is sufficient)
Consumers try to obtain the largest possible total satisfaction (utility) from the market basket that they buy with their incomes.
Trang 2E.g Utility for cookies
Utility Table
Utility Function: Formula that assigns level of utility to
individual market baskets
U = f (X) Number of cookies Utility
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Marginal Utility (MU)
consuming 1 additional unit of goods or service
How much happier is individual from consuming one more unit
of coffee
quantity of a good or service
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Marginal utility -MU
Observation: Marginal Utility is diminishing as consumption increase
'( )
U
X
Number
of
cookies
Utility MU
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Principle of Diminishing Marginal Utility
As more good is consumed, additional utility consumer gains will be smaller and smaller
consumer makes choices that make them happier
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Trang 3Application 1: Diminishing Marginal Utility
and Demand curve
The maximum price that a buyer is willing and able to pay for a good.
Measures how much the buyer values the good or service.
willingness to pay; The smaller MU, the lower willingness
to pay
downward demand curve
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P, MU
D (MU)
MU 3
O
X
MU 1
MU 2
MU n
X 1 X 2 X 3 X n
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Application 2: Diminishing Marginal Utility
and Consumer surplus
be willing to pay for a good depends upon the expected
utility (benefits) of that good
CS = MUx – Px
A lower market price will increase consumer surplus
A higher market price will reduce consumer surplus
E.g.
P= $3/pc
CS1= 9 – 3 = 6
CS2= 7- 3 = 4
CS3= 5 - 3 = 2
CS4= 3 - 3= 0
CS= CS1 + CS2 + CS3 = 12
Number
of cookies Utility MU
Trang 4E.g: Consumer Surplus
13
3
9
5
Q
7
1 2 3 4
P
CS
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Consumer Surplus: Graphical
14
below the demand curve and above the market price line
CS = AP*E*
P, MU
D (MU)
O
Q
P*
E*
A
Q*
CS
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TU -Total Utility
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consumer gets from consuming some market baskets
U = X.Y
U = X 1/2 Y 1/2
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2 Theory of Consumer’s Choice
Three steps:
1 Consumer Preference
2 Budget Constraint
3 Given preferences and limited incomes, what amount of goods will be purchased?
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Trang 5Consumer Preferences – Basic Assumptions
containing different goods based on their preference
(1) Preferences are complete.
Consumers can rank market baskets
(2) Preferences are transitive.
If prefer A to B, and B to C, the must prefer A to C
(3) Consumers always prefer more of any good to less.
More is better
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Example
Market Basket Units of Food Units of Clothing
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The consumer prefers
A to all combinations
in the yellow box, while all those in the pink
box are preferred to A.
Example
Food
10
20
30
40
10 20 30 40
Clothing 50
G A
E H
B
D
Consumer Preferences
using indifference curves
baskets that the person is indifferent to
A person will be equally satisfied with either choice
Same level of Utility.
Trang 6•Indifferent between B,
A, & D
•E is preferred to U 1
•U 1 is preferred to H & G
Indifference Curves: Example
Food
10
20
30
40
10 20 30 40
Clothing 50
U 1
G
D A
E H
B
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Indifference Map
Food
10 20 30 40
10 20 30 40
Clothing 50
U 2
G
D A
E B
U 3
U 1
To describe preferences for all combinations of goods/services, we have a set of indifference curves – an indifference map
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Indifference Curves: Characteristics
Indifference curves slope downward to the right.
If it sloped upward it would violate the assumption that more is preferred to less.
Some points that had more of both goods would be indifferent to a basket with
less of both goods
Indifference curves can not cross
Violates assumption that more is better
Why? What if we assume they can cross
The shapes of indifference curves describes how a consumer is willing to
substitute one good for another
We measure how a person trades one good for another using the marginal rate
of substitution (MRS)
Indifference curves are convex
As more of one good is consumed, a consumer would prefer to give up fewer
units of a second good to get additional units of the first one
The MRS decreases as we move down the indifference curve
Along an indifference curve there is a diminishing marginal rate of substitution
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Tỷ lệ thay thế cận biên- MRS
B
A
D
MRS = 2
MRS = 1
Y MRS X
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X
10 20 30 40
10 20 30 40
Y 50
U *
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Trang 70
RS
X
Y
X
Y
MU X MU Y
MU Y
X MU
MU M
MU
Quiz Caculate MRS in the following functions:
b. U = X1/2.Y1/2
c. U = X0.3.Y0.7
Marginal Rate of Substitution
Two goods are perfect substitutes when the marginal rate of
substitution of one good for the other is constant.
Example: a person might consider apple juice and orange juice
perfect substitutes
They would always trade 1 glass of OJ for 1 glass of Apple Juice
Consumer Preferences
Orange Juice (glasses)
Apple Juice (glasses)
2 3 4 1
1 2 3 4
0
Perfect Substitutes
Trang 8Consumer Preferences
Two goods are perfect complements when the indifference
curves for the goods are shaped as right angles.
Example: If you have 1 left shoe and 1 right shoe, you are
indifferent between having more left shoes only
Must have one right for one left
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Consumer Preferences
Right Shoes
Left Shoes
2 3 4 1
1 2 3 4
0
Perfect Complements
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Budget Constraints
Indicates all combinations of two commodities for which total
money spent equals total income.
We assume only 2 goods are consumed, so we do not consider
savings
amount of clothing
Then
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Budget Constraints
Market Basket
Food
P F = $1
Clothing
P C = $2
Income
I = P F F + P C C
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Trang 9F
P
P F
C Slope
-2
1
The Budget Line
10
20
A
B
D E G
(I/P C) = 40
Food
20
10
20
30
0
Clothing
I C P F
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The Budget Line - Changes
An increase in income causes the budget line to shift outward, parallel to the original line (holding prices constant).
Can buy more of both goods with more income
A decrease in income causes the budget line to shift inward, parallel to the original line (holding prices constant).
Can buy less of both goods with less income
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The Budget Line - Changes in Income
A increase in
income shifts
the budget line
outward
Food (units per week)
Clothing
(units
per week)
40
20
40
60
80
0
(I = $160)
BL 2 (I = $80)
BL 1
BL 3
(I =
$40)
A decrease in income shifts the budget line inward
The Budget Line - Changes in Price
(P F= 1)
L 1
An increase in the price of food to
$2.00 changes the slope of the budget line and rotates it inward.
L 3
(P F = 2)
(P F= 1/2)
L 2
A decrease in the price of food to
$.50 changes the slope of the budget line and rotates it outward.
40 Food (units per week)
Clothing (units per week)
40
Trang 10Consumer Choice
maximize their satisfaction, given the limited budget
available to them
conditions:
It must be located on the budget line.
It must give the consumer the most preferred combination of
goods and services.
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Consumer Choice
U 3
D C
X
20
Y
20 30 40
0
U 1 A
B
C F P
P MRS
Quiz 2
Consumer has preferences over two goods: books and movies
Two bundles, which lie on the same indifference curve for this
consumer, are shown in the table below.
Which of the following bundles could not lie on the same
indifference curve with A and B and satisfy the four properties
of indifference curves?
a One movie and five books
b Three movies and three books
c Five movies and one book
d One movie and seven books
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Quiz 3
commodities X and Y Prices of X is $3 and price of Y is
$1,
Utility function of this person is U = X.Y
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