Kinh tế học - Chapter 5: Theory of consumer behavior

Chapter 5Theory of Consumer BehaviorThe Consumer’s Optimization ProblemIndividual consumption decisions are made with the goal of maximizing total satisfaction from consuming various goods and servicesSubject to the constraint that spending on goods exactly equals the individual’s money income2Consumer TheoryAssumes buyers are completely informed about:Range of products availablePrices of all productsCapacity of products to satisfyTheir incomeRequires that consumers can rank all consumption bundles based on the level of satisfaction they would receive from consuming the various bundles3Typical Consumption Bundles for Two Goods, X & Y (Figure 5.1)4Properties of Consumer PreferencesCompletenessFor every pair of consumption bundles, A and B, the consumer can say one of the following:A is preferred to BB is preferred to AThe consumer is indifferent between A and BTransitivityIf A is preferred to B, and B is preferred to C, then A must be preferred to CNonsatiationMore of a good is always preferred to less5UtilityBenefits consumers obtain from goods & services they consume is utilityA utility function shows an individual’s perception of the utility level attained from consuming each conceivable bundle of goods6Indifference CurvesLocus of points representing different bundles of goods, each of which yields the same level of total utilityNegatively sloped & convex7Typical Indifference Curve (Figure 5.2)8Marginal Rate of SubstitutionMRS shows the rate at which one good can be substituted for another while keeping utility constantNegative of the slope of the indifference curveDiminishes along the indifference curve as X increases & Y decreasesRatio of the marginal utilities of the goods9Slope of an Indifference Curve & the MRS (Figure 5.3)Quantity of good XQuantity of good Y0IC (360,320)600800ABTT’36032010Indifference Map (Figure 5.4)Quantity of YQuantity of XIIIIIIIV11Marginal UtilityAddition to total utility attributable to the addition of one unit of a good to the current rate of consumption, holding constant the amounts of all other goods consumed12Consumer’s Budget LineShows all possible commodity bundles that can be purchased at given prices with a fixed money income13Consumer’s Budget Constraint (Figure 5.5)14Typical Budget Line (Figure 5.6)Quantity of YQuantity of X••AB15Panel B – Changes in price of X200100AB250DRN120240Shifting Budget Lines (Figure 5.7)Quantity of YQuantity of XPanel A – Changes in money incomeQuantity of YQuantity of XAB100FZ80160200125C16Utility MaximizationUtility maximization subject to a limited money income occurs at the combination of goods for which the indifference curve is just tangent to the budget line17Utility MaximizationConsumer allocates income so that the marginal utility per dollar spent on each good is the same for all commodities purchased18A•IC••BIIRTConstrained Utility Maximization (Figure 5.8)Quantity of burgersQuantity of pizzas08020100406010203040507010903050•EIII•DIV451519Individual Consumer DemandAn individual’s demand curve for a specific commodity relates utility-maximizing quantities purchased to market pricesMoney income & prices held constantSlope of demand curve illustrates law of demand—quantity demanded varies inversely with price20Deriving a Demand Curve (Figure 5.9)Quantity of YPrice of X ($)Quantity of XQuantity of X10020012510000Px=$10Px=$5Px=$89065509065505810Demand for X21Market Demand & Marginal BenefitList of prices & quantities consumers are willing & able to purchase at each price, all else constantDerived by horizontally summing demand curves for all individuals in marketBecause prices along market demand measure the economic value of each unit of the good, it can be interpreted as the marginal benefit curve for a good22Derivation of Market Demand (Table 5.1) Quantity demandedPriceConsumer 1Consumer 2Consumer 3Market demand$6215433121358100710135068014325316121923Derivation of Market Demand Figure (5.10)24Substitution & Income EffectsWhen price changes, total change in quantity demanded is composed of two partsSubstitution effectIncome effect25Substitution & Income EffectsSubstitution effectChange in consumption of a good after a change in its price, when the consumer is forced by a change in money income to consume at some point on the original indifference curveIncome effectChange in consumption of a good resulting strictly from a change in purchasing power26Income & Substitution Effects: A Decrease in Px (Figure 5.12)Total effect of price decrease=Substitution effect+Income effect 9=5+4Total effect of price decrease=Substitution effect+Income effect 3=5+(-2)27Substitution & Income EffectsConsider the substitution effect alone:Amount of good consumed must vary inversely with priceIncome effect reinforces the substitution effect for a normal good & offsets it for an inferior good28Summary of Substitution & Income Effects (Table 5.2)Substitution EffectIncome EffectPrice of X decreases:Normal GoodInferior GoodPrice of X increases:Normal GoodInferior GoodX risesX risesX risesX risesX fallsX fallsX fallsX falls29