1 / 78

Consumer Behavior: Preferences, Constraints, and Choices

This chapter explores the study of consumer behavior, including consumer preferences, budget constraints, and consumer choices. It also covers topics such as individual demand, substitution and income effects, market demand, consumer surplus, and empirical estimation of demand.

bemery
Download Presentation

Consumer Behavior: Preferences, Constraints, and Choices

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 2 Consumer Behavior, Individual and Market Demand

  2. Topics to be Discussed 1.Preliminaries 2.Consumer Preferences 3.Budget Constraints 4.Consumer Choice 5.Marginal Utility and Consumer Choices

  3. Topics to be Discussed 6.Individual Demand 7.Substitution and Income Effects 8.Market Demand 9.Consumer Surplus 10.Empirical Estimation of Demand

  4. Preliminaries There are three steps involved in the study of consumer behavior. 1) We will study consumer preferences. • To describe how and why people prefer one good to another. • 2) Then we will turn to budget constraints. • People have limited incomes. 3) Finally, we will combine consumer preferences and budget constraints to determine consumer choices. • What combination of goods will consumers buy to maximize their satisfaction?

  5. Consumer Preferences Market Baskets • Amarket basketis a collection of one or more commodities. • One market basket may be preferred over another market basket containing a different combination of goods. • Three Basic Assumptions 1) Preferences are complete. 2) Preferences are transitive. 3) Consumers always prefer more of any good to less.

  6. Consumer Preferences A 20 30 B 10 50 C 40 20 D 30 40 E 10 20 F 10 40 Market Basket Units of Food Units of Clothing

  7. Clothing (units per week) B 50 F D 40 A 30 C 20 IC1 E 10 Food (units per week) 10 20 30 40 Consumer Preferences Indifference Curves Indifference curves represent all combination of market baskets that provide the sam level of satisfaction to a person. • Combination A,B, & C • yield the same satisfaction(IC1) • D is preferred to IC1 • IC1 is preferred to E & F

  8. Consumer Preferences • Indifference curves slope downward to the right. Indifference Curves • Any market basket lying above and to the right of an indifference curve is preferred to any market basket that lies on the indifference curve.

  9. Consumer Preferences • Anindifference mapis a set of indifference curves that describes a person’s preferences for all combinations of two commodities. • Each indifference curve in the map shows the market baskets among which the person is indifferent. Indifference Maps • Finally, indifference curves cannot intersect.

  10. Clothing (units per week) C A B IC3 IC2 IC1 Food (units per week) Consumer Preferences Market basket A is preferred to B. Market basket B is preferred to C.

  11. Clothing (units per week) A B IC2 C IC1 Food (units per week) Consumer Preferences Indifference Curves Cannot intersect The consumer should be indifferent between A, B and C. However, B contains more of both goods than C.

  12. Clothing (units per week) A 16 14 - 6 12 10 B 1 8 - 4 C 6 1 D - 2 E 4 1 -1 IC 1 2 Food (units per week) 1 2 3 4 5 Consumer Preferences Observation: The amount of clothing given up for a unit of food decreases from 6 to 1 : (Diminishing MRS)

  13. Consumer Preferences Marginal Rate of Substitution • Themarginal rate of substitution (MRS)quantifies the amount of one good a consumer will give up to obtain more of another good. • It is measured by the slope of the indifference curve (Negative).

  14. Clothing (units per week) A 16 14 MRS = - 6 - 6 12 B 10 MRS = - 4 1 8 - 4 C MRS = - 2 6 1 D - 2 4 E 1 -1 IC 1 2 Food (units per week) 1 2 3 4 5 Consumer Preferences MRSF for C = -C/F MRS(AB) = - 6 MRS(BC) = - 4 MRS(CD) = - 2 MRS(DE) = - 1

  15. Consumer Preferences Marginal Rate of Substitution : MRS • We will now add a three assumptionregarding consumer preference: 1) Along an indifference curve there is a diminishing marginal rate of substitution. • Note the MRS for AB = -6,BC = –4,CD = -2 and DE = -1. 2) Indifference curves are convex because 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. 3) Consumers prefer a balanced market basket.

  16. Apple Juice (glasses) 4 3 2 1 IC1 IC3 IC2 IC4 Orange Juice (glasses) 0 1 2 3 4 Consumer Preferences Perfect Substitutes Two goods are perfect substitutes when the marginal rate of substitution of one good for the other is constant .

  17. Left Shoes 4 IC4 IC3 3 IC2 2 IC1 1 Right Shoes 0 1 2 3 4 Consumer Preferences Perfect Complements Two goods are perfect complementswhen the indifference curvess for goods are shaped as right angles.

  18. Consumer Preferences Utility • Utility:Numerical score representing the satisfaction that a consumer gets from a given market basket. • Example • If buying 3 copies ofMicroeconomics makes you happier than buying one shirt, then we say that the books give you more utility than the shirt.

  19. Consumer Preferences UtilityFunctions Assume: The utility function for food (F) and clothing (C) U(F,C) = F + 2C Market Baskets F:units C:units U(F,C) = F + 2C A 8 3 8 + 2(3) = 14 B 6 4 6 + 2(4) = 14 C 4 4 4 + 2(4) = 12 The consumer is indifferent to A & B and prefers A & B to C.

  20. Clothing (units per week) 10 C A IC3 = 100 (Preferred to IC2) 5 B IC2 = 50 (Preferred to IC1) 2.5 IC1 = 25 Food (units per week) 0 2.5 5 10 Consumer Preferences Utility Functions & Indifference Curves Assume:Market Basket is U = FC C : 2.5(10) = 25 A : 5(5) = 25 B : 10(2.5) = 25

  21. Budget Constraints • Budget constraintsalso limit an individual’s ability to consume in light of the prices they must pay for various goods and services. • The budget line indicates all combinations of two commodities for which total money spent equals total income.

  22. Budget Constraints • The Budget Line • Let I equal thetotal income,F equal the amount of food purchased, and C is the amount of clothing. • Price of food = PF and price of clothing = PC • Then PF.F is the amount of money spent on food, and PC.C is the amount of money spent on clothing. • The budget line then can be written: I = PF.F + PC.C

  23. Budget Constraints A 0 40 $80 B 20 30 $80 D 40 20 $80 E 60 10 $80 G 80 0 $80 Market Basket Food (F) Clothing (C) Total Spending PF = ($1) PC = ($2) I = PF.F + PC.C

  24. Clothing (units per week) A (I/PC) = 40 Budget Line F + 2C = $80 B 30 10 D 20 20 E 10 G Food (units per week) 0 20 40 60 80 = (I/PF) Budget Constraints Pc = $2 , PF = $1 , I = $80 Slope = -C/F = -10/20 = -1/2 = -PF/PC

  25. Budget Constraints • The Budget Line • The vertical intercept(I/PC), illustrates the maximum amount of C that can be purchased with income I. • The horizontal intercept(I/PF),illustrates themaximum amount of Fthat can be purchased with income I. • The slope is the negative of the ratio of the prices of food and clothing.

  26. Budget Constraints Effects of Changes in Income and Prices • Income Changes(Prices Constant) • An increase in income causes the budget line to shift outward, parallel to the original line. • A decrease in income causes the budget line to shift inward, parallel to the original line.

  27. Clothing (units per week) BL2 80 BL1 40 BL3 20 I1 = $80 I2 = $160 I3 = $40 Food (units per week) 0 40 160 80 Budget Constraints A increase in income shifts the budget line outward A decrease in income shifts the budget line inward

  28. Budget Constraints • Price Changes(Income Constant) • If the price of one goodincreases,the budget lineshifts inward, pivoting from the other good’s intercept. Effects of Changes in Income and Prices • If the price of one gooddecreases,the budget lineshifts outward, pivoting from the other good’s intercept.

  29. Clothing (units per week) 40 BL1 BL3 BL2 (PF = $0.5) (PF = $1) (PF = $2) Food (units per week) 0 160 40 80 Budget Constraints An increase in the price of food to $2.00 changes the slope of the budget line and rotates it inward. A decrease in the price of food to $.50 changes the slope of the budget line and rotates it outward.

  30. Budget Constraints Effects of Changes in Income and Prices • Price Changes(Income Constant) • If the two goods increase in price, but the ratio of the two prices is unchanged, the slope will not change. However, the budget line will shift inward to a point parallel to the original budget line. • If the two goods decrease in price, but the ratio of the two prices is unchanged, the slope will not change. However, the budget line will shift outward to a point parallel to the original budget line.

  31. Clothing Clothing Income constant Pc decrease $2 to $1 PF decrease $1 to $0.5 Income constant Pc increase $2 to $4 PF increase $1 to $2 BL2 80 BL1 BL1 40 40 BL2 20 0 0 40 160 Food Food 80 160 80 Budget Constraints

  32. Consumer Choice • Consumers choosea combination of goods that will maximize the satisfaction they can achieve, given the limited budget available to them. • The maximizing market basket must satisfy two conditions: 1) It must be located on the budget line. 2) Must give the consumer the most preferred combination of goods.

  33. Consumer Choice Recall, the slope of an indifference curve is: MRS = -C/F Further, the slope of the budget line is: Slope = -C/F = -PF/PC Therefore, it can be said that satisfaction is maximized where: MRS = PF/PC It can be said thatsatisfaction is maximizedwhenmarginal rate of substitution(of F and C) isequalto theratio of the prices(of F and C).

  34. Pc = $2 , PF = $1 , I = $80 Clothing (units per week) Point B does not maximize satisfaction because the MRS = - (-10/10) = 1 is greater than the price ratio (1/2) = 0.5. Point A the budget line and indifference curve IC2 are tangent, maximize sactisfaction because the MRS equals the price ratio, MRS = PF/PC = (1/2) = 0.5. 40 D B 30 -10C A 20 IC3 Point D cannot be attained given the current budget constraint. IC2 +10F IC1 Food (units per week) 0 40 80 20 Consumer Choice

  35. Consumer Choice Utility Maximization • Mathematical Approach: โดยวิธี Lagrange Multiplier () มีขั้นตอนดังต่อไปนี้ (เมื่อกำหนดให้ F = Food , C = Clothing) Maximize Utility : U = U(F,C) = FC Budget Constraint : I = PF.F + PC.C ฉะนั้น จะได้สมการที่ต้องการคือZ = FC + (I – PF.F – PC.C).......(1) • หาค่าอนุพันธ์ย่อย(Partial Derivative) จากการเปลี่ยนแปลง F,C และ  ในสมการ (1) เพราะต้องหาค่า F,C และ  ที่ทำให้ความพอใจของผู้บริโภคสูงสุด

  36. Consumer Choice Utility Maximization Z/ F = C – PF = 0 .................................. (2) Z/ C = F – PC = 0 ................................. (3) Z/   = I – PF.F – PC.C = 0 ................................. (4) จากสมการ (2) จะได้:  = C/PF ............................. (5) แทนค่า  ในสมการ (3) จะได้ :F = C(PC/PF) ...................... (6) แทนค่า F ในสมการ (4)จะได้ :I = PF.[C(PC/PF)] + PC.C = 2C.PCหรือ C = I/2PC..................... (7)

  37. Consumer Choice Utility Maximization แทนค่า C ในสมการ (6)จะได้ :F = (I/2PC)(PC/PF) = I/2PF........ (8) เมื่อกำหนดให้: I = $80 , PC = $2 และ PF = $1 จงหาปริมาณ F และ Cที่ทำให้ผู้บริโภคได้รับความพอใจสูงสุด แทนค่า I, PCและ PF ในสมการ(7) และ (8) C = (80)/(2x2) = 20 units F = (80)/(2x1) = 40 units ดูได้จากรูปข้างต้น

  38. Marginal Utility andConsumer Choice • Marginal utility (MU) measures the additional satisfaction obtained from consuming one additional unit of a good. Marginal Utility

  39. Example QF (unit)MUF(unit) 0 - 1 9 2 7 3 5 Marginal Utility andConsumer Choice • Example • The marginal utility derived from increasing from 0 to 1 units of food might be 9 • Increasing from 1 to 2 might be 7 • Increasing from 2 to 3 might be 5 • Observation: Marginal utility is diminishing Marginal Utility

  40. Marginal Utility andConsumer Choice • The principle of diminishing marginal utilitystates that as more and more of a good is consumed, consuming additional amounts will yield smaller and smaller additions to utility. Diminishing Marginal Utility

  41. Marginal Utility andConsumer Choice • If consumption moves along an indifference curve, the additional utility derived from an increase in the consumption one good,food (F),must balance the loss of utility from the decrease in the consumption in the other good,clothing (C). Marginal Utility and the Indiffere Curve

  42. Clothing (units per week) A C1 -C B C2 +F IC1 Food (units per week) F1 F2 Marginal Utility andConsumer Choice Marginal Utility and the Indiffere Curve F : Utility Increase = MUF. F C : Utility Decrease = - MUC. C Then : MUF. F = - MUC. C OR : MUF. F + MUC. C = 0

  43. Marginal Utility andConsumer Choice • Formally: MUF. F + MUC. C = 0 • Rearranging: -C/F = MUF/MUC • Because: -C/F = MSR F for C • Then: MSR F for C = MUF/MUC

  44. When consumers maximize satisfaction the: Marginal Utility andConsumer Choice MSR F for C = PF/PC • Since the MRSF for C is also equal to the ratio of the marginal utilities of consuming F and C,it follows that: MUF/MUC= PF/PC

  45. Marginal Utility andConsumer Choice • Which gives the equation for utility maximization: MUF/PF = MUC/PC • Total utility is maximizedwhen the budget is allocated so thatthe marginal utility per unit of expenditure is the same for each good. • This is referred to as theequal marginal principle.

  46. Effect of a Price Changes Clothing (units per month) Assume : I = $20 PC = $2 PF = $2, $1, $0.50 The impact of a change in the price of food can be illustrated using IC and BL. 10 A Three separateindifference curves are tangent to each budget line. 6 D 5 IC1 B 4 IC3 IC2 Food (units per month) O 20 40 12 10 4 Individual Demand

  47. Effect of a Price Changes Clothing (units per month) The price consumption curve traces out the utility maximizing market basket for the various price for food. 10 Price Consumption Curve : PCC A 6 IC1 D 5 B 4 IC3 IC2 Food (units per month) O 20 40 12 10 4 Individual Demand

  48. Price of Food E $2.0 G $1.0 Demand Curve For Food : DF H $0.50 Food (units per month) 4 12 20 Individual Demand Effect of a Price Changes Individual Demand relates the quantity of a good that a consumer will buy to the price of that good.

  49. Individual Demand The Individual Demand Curve • Two Important Properties of Demand Curves 1) The level of utility that can be attained changes as we move along the curve. 2) At every point on the demand curve, the consumer is maximizing utility by satisfying the condition that the MRS of food for clothing equals the ratio of the prices of food and clothing.(MRSF for C = PF/PC OR Slope IC = Slope BL)

  50. Effect of a Income Changes Clothing (units per month) Assume: PF = $2 Pc = $2 I = $20, $40, $60 The impact of a change in income can be illustrated using IC and BL. Income Consumption Curve : ICC D An increase in income, with the prices fixed, causes consumers to alter their choice of market basket. 15 IC3 B 10 IC2 A 6 IC1 Food (units per month) 4 10 15 Individual Demand

More Related