12/17/2012

TheConceptofChoiceandUtility
Utility isarepresentationofpreferencesover somesetofgoodsandservices. Satisfaction asubjectivepleasurethatan individualcanderivefromconsuminggoods orservices.

TheConsumersBehaviour
Chapter5 Group4

TastesandPreferences
Subjectiveinnature Distinguishpersonality LessimportantthanincomeandRelative prices i

LawofDiminishingMarginalUtility
Themoregoodsareconsumed,theextra satisfactionormarginalutilityreceived decreases.

ConsumersEquilibrium
themeetingpointofconsumersneedsand resource.

ConsumersEquilibrium(contd)
3AssamptionofrationalReferences: Completeness Nonsatiation Transitivity

12/17/2012

PriceConsumptionCurve
Thisindicatestheincomeoftheconsumer beinggiven,howthedemandofagoodwill beeffectedwithchangeinitsprice.

THEINDIFFERENCECURVE

Thenegativeslopedindifferencecurvecanbe explainedthroughmarginalrateof substitution(MRSxy).MRSistheamountof goodYthataconsumeriswillingtogiveupin exchangeforgoodXandstilllieonthesame indifferencecurve.

Figure32showswhyindifferencecurvesdo notintersectatthesamepoint.Inindifference curveI,pointCandpointBprovidethesame levelofsatisfaction,InindifferencecurveII, pointCandpointAalsoyieldthesamelevel ofsatisfaction.Therefore,itfollowsthatpoint AandpointBhaveequalsatisfaction,because theylieonthesameindifferencecurveand notdifferentlyasoneassumes.Itactually violatesthetransitivityprinciple.

THEBUDGETCONSTRAINTS
AbudgetlineshowsthedifferentcombinationsofgoodXandgood Ythataconsumercanpurchasegivenhisincomeandthepricesof thegoods. y y
Initial xx Budgetline

Example1:
GiventhepriceofGoodXis1pesoandthepriceofGoodYis2pesosandthe consumersincomeis20pesospertimeperiod,allspentonbothgoods.The budgetlineisgivenbylineABinFigure35.iftheconsumerspentallofhisincome onGoodY,hecouldpurchase10unitsofit(20pesos/2pesos=10)ThisispointA. IfallincomeisspentonGoodX,hecouldpurchase20unitsofthatgood(20pesos/ 1pesos=20).ThisispointB.Byjoiningbothpoints, y 12

Figure33.budgetline budgetline

Figure34.movementof

Figure35.budgetLineAB

12/17/2012

ComputingfortheMRSxy
Ealier,wedefinedMRSastheamountof GoodYthataconsumeriswillingtogiveup unexchangeforgoodXandstilllieonthe same. same
MRSXY=Qy Qy

Indifferencecurve.TheformulaforMRSxyis givenas:

Intable16showstheMRSxybetween succeedingpointonindifferencecurvesI,II, andIIIgivenonthetable15.noticethat MRSxyistheabsolutevalueoftheslopesof variouspoints.Itindicateshowmuchunitsof GoodYaconsumershouldgiveuptoattain additionalunitsofGoodX.thusMRSxy betweenpointBtopointCis4,meaningthat theconsumershouldgiveup4unitsofGoodY togainIunitofGoodX.

IncomeandSubstitutionEffect

IncomeEffect
Achangeinthedemandofagoodor service,inducedbyachangeintheconsumers' discretionaryincome. Anyincreaseordecreaseinprice correspondinglydecreasesorincreases consumers'discretionaryincomewhich,inturn, causesalowerorhigherdemandforthesameor someothergoodorservice..

SubstitutionEffect
Aneffectcausedbyariseinprice thatinducesaconsumertobuymoreofa relativelylowerpricedgoodandlessofa higherpricedone. one

IncomeandSubstitutionEffect
Inageneralsense,themost importantreasonforstudyingconsumer behavioristhesignificantroleitplaysinour lives Muchofourtimeisspentdirectlyinthe lives. marketplace,shoppingorengaginginother activities.