The document discusses consumer behavior theory including consumer preferences represented by indifference curves, budget constraints represented by budget lines, and how consumers maximize satisfaction subject to their budget by choosing the highest indifference curve their budget allows. It covers concepts like marginal rate of substitution, effects of changes in prices and income on budgets, and conditions for consumer choice maximization.
The document discusses consumer behavior theory including consumer preferences represented by indifference curves, budget constraints represented by budget lines, and how consumers maximize satisfaction subject to their budget by choosing the highest indifference curve their budget allows. It covers concepts like marginal rate of substitution, effects of changes in prices and income on budgets, and conditions for consumer choice maximization.
The document discusses consumer behavior theory including consumer preferences represented by indifference curves, budget constraints represented by budget lines, and how consumers maximize satisfaction subject to their budget by choosing the highest indifference curve their budget allows. It covers concepts like marginal rate of substitution, effects of changes in prices and income on budgets, and conditions for consumer choice maximization.
The document discusses consumer behavior theory including consumer preferences represented by indifference curves, budget constraints represented by budget lines, and how consumers maximize satisfaction subject to their budget by choosing the highest indifference curve their budget allows. It covers concepts like marginal rate of substitution, effects of changes in prices and income on budgets, and conditions for consumer choice maximization.
Behavior CHAPTER 3 OF PINDYCK The Theory of Consumer Choice
Description of how consumers allocate incomes among different
goods and services to maximize their wellbeing Three steps to understand consumer behavior: 1. Consumer Preferences 2. Budget Constraints 3. Consumer Choices Consumer Preferences Market Basket – (or bundle) is a list with specific quantities of one or more goods. Some Basic Assumptions about Preferences
1. Completeness – means that consumers can compare and rank
bundles. Ex. If Juan prefers Orange over an Apple or Apple over an Orange or indifferent between the two. 2. Transitivity- means that if a consumer prefers basket A to B, and B to C, then the consumer prefers A to C. 3. More is better than less- consumers prefers more of any good to less. Individual Preferences Indifference Curves
indifference curve- are curves representing all combinations of market baskets that provide a consumer with the same level of satisfaction. Indifference Maps The Shape of Indifference Curves
marginal rate of substitution (MRS)- is the maximum amount of a good that a
consumer is willing to give up in order to obtain one additional unit of another good. Convexity
Diminishing Marginal Rate of Substitution
Indifference curves are usually bowed inward. The term convex means that the slope of the indifference curve increases (i.e., becomes less negative) as we move down along the curve. In other words, an indifference curve is convex if the MRS diminishes along the curve. Perfect Substitutes and Perfect Complements perfect substitutes- two goods for which the marginal rate of substitution(MRS) of one for the other is a constant.
perfect complements- two
goods for which the MRS is zero or infinite; the indifference curves are shaped as right angles. Budget Constraints
budget constraints- the constraints that consumers face as a result
of limited incomes. budget line- all combinations of goods for which the total amount of money spent is equal to income. Suppose, for example, that our consumer has a weekly income of $80, the price of food is $1 per unit, and the price of clothing is $2 per unit. Table 3.2 shows various combinations of food and clothing that she can purchase each week with her $80. The Effects of a Change in Income on the Budget Line The Effects of a Change in Prices on the Budget Line Consumer Choice Maximizing Consumer Satisfaction
The maximizing market basket must satisfy two conditions:
1. It must be located on the budget line. 2. It must give the consumer the most preferred combination of goods and services.
MRS = PF /PC Note: Satisfaction is maximized when the marginal rate of substitution (of F for C) is equal to the ratio of the prices (of F to C). Thus, the consumer can obtain maximum satisfaction by adjusting his consumption of goods F and C so that the MRS equals the price ratio.
Download ebooks file Economics for Investment Decision Makers Workbook Micro Macro and International Economics 1st Edition Christopher D. Piros Cfa all chapters
Download ebooks file Economics for Investment Decision Makers Workbook Micro Macro and International Economics 1st Edition Christopher D. Piros Cfa all chapters
