KINH TẾ VI MÔ Consumer behaviour

The total consumer surplus generated by purchases of a good at a given price is equal to the area below the demand curve but above that price... INDIFERENCE CURVEThe utility of a consum

CHAPTER 4: THE RATONAL

CONSUMER

THE THEORY OF CONSUMER

BEHAVIOUR

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5 4

3 2

1 0

Đạt

A consumer’s willingness to pay for a good is the maximum price at which he

or she would buy that good

Consumer surplus

Dương

Graphically, the TWTP is the

area below the demand curve.

Consumer Surplus

Individual Consumer surplus is the net gain to a

buyer from the purchase of a good

It is equal to the difference between the buyer’s

willingness-to-pay and the expense

Total consumer surplus is the sum of the individual

consumer surpluses of all the buyers of a good

CS = TWTP - TE

The total willingness-to-pay is equal to the area below the demand curve.

The total consumer surplus generated by purchases of a good

at a given price is equal to the area below the demand curve but above that price.

D

Consum

er surplus

1 million 0

1 INDIFERENCE CURVE

The utility of a consumer is a measure of the satisfaction the consumer derives from the consumption of goods and services

A utility function gives the total utility generated by a consumption bundle

The unit of utility is a util

THE LAW OF DIMINISHING

MARGINAL UTILITY

A psychological observation

As a consumer consumes more and more units

of a specific commodity in a certain period of

time, utility from the successive units goes on

diminishing.

MU

Q 0

MU 10

4

INDIFFERENCE CURVE

combinations of commodities that yield

the same level of utility

Suppose that a person consumes two

goods, i.e X and Y

INDIFFERENCE CURVE

Properties of Indifference curves

The farther from the origin an IC

is, the higher utility it displays.

Y

Y1

U1 U2

INDIFFERENCE CURVE

U1A

INDIFFERENCE CURVE

units of good X, he/she can reduce the

amount of good Y while enjoy the

same level of utility.

 ICs slope downward.

INDIFFERNCE CURVE

Marginal rate of substition of good X for good Y,

denoted as MRSXY, reflects the amount of good Y the

consumer has to give up to consume an extra unit of

good X holding the same level of utility

IC

INDIFFERENCE CURVE

Moving from A to B:

Changes in the amounts of X and Y is ΔX and ΔY

Change in total utility

= Marginal utility × Change in quantity.

IC

INDIFFERENCE CURVE

ΔTUX = MUX * ΔX

ΔTUY = MUY * ΔY

ΔTU = ΔTUX + ΔTUY = 0

MUX * ΔX+ MUY * ΔY=0(1)

IC

INDIFFERENCE CURVE

From equation (1), we have

INDIFFERENCE CURVE

 Marginal rate of substitution of good X for good Y

decreases as the consumer consumes more of good X

⇒ |ΔY/ΔX| negatively covariates with X

⇒ ΔY/ΔX positively covariates with X

⇒ Y’(X) positively covariates with X

⇒ Y’’ >0

⇒ ICs bow inward.

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TWO EXTREME CASES

PERFECTLY COMPLEMENTS PERFECTLY SUBSTITUTES

BUDGET LINE

cost of a consumer’s consumption bundle

be no more than the consumer’s total

income

income I to spend on two commodities X

BUDGET LINE

⇒ PX * X + PY * Y = I

⇒ Y = - (PX/ PY) * X + I/ PY (2)

Equation (2) is the equation of budget line.

BUDGET LINE

If income changes while prices of both

goods remain unchanged, budget line will

shift parallel

If price of one good changes while

holding income and price of the other

good, budget line will pivot.

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X

Y

0 I/PY

I/PX

Optimal Consumption Choice

 The optimal consumption bundle is the consumption

consumer’s total utility given his

or her budget constraint.

OPTIMAL CHOICE

Among the five bundles, the

consumer

C is possible but inefficient

A, B, M are both possible and

efficient, of which M brings the highest level of satisfaction Thus M is the optimal bundle.

OPTIMAL BUNDLE

At point M

IC’s slope= BL’s slope

⇒-MUX/ MUY = - PX/PY

each good is the same.

X

Y

0

A I/PY

I/PXBL

M

U2B

Extreme cases

A consumer has an utility function

U = X.Y

is 10 and 15 dollars per unit.

 How many units of good X and Y