Household Behavior and Consumer Choice

CHAPTER 5
Household Behavior and

Consumer Choice
Prepared by: Fernando

Quijano
and Yvonn Quijano
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Understanding the Microeconomy and the
Role of Government
Part Two Part Three
Chapter 5 Chapters 7-8 Chapters 12-15
Household Behavior Equilibrium
in Competitive
Demand in output Output Markets Market Imperfections
markets and the Role of
Short run Government
Supply in input
markets Long run Chapter 11 Imperfect market
structures
The Competitive
Market System Externalities, public
goods, imperfect
General information, social
equilibrium and choice
Chapters 6-7 Chapters 9-10
efficiency
Income distribution
Firm Behavior Competitive and poverty
Input Markets
Choice of
technology Labor/land
Supply in output Capital

markets
Demand in input
markets
Firms and Household Decisions
Perfect Competition
A key assumption in the study of household and

firm behavior is that all input and output markets
are perfectly competitive.
Persaingan sempurna struktur industri dimana ada

banyak perusahaan yang masing masing berskala
kecil jika dibandingkan dengan industri dan
menghasilkan produk yang nyaris identik , dan
dimana tidak ada perusahaan yang cukup besar
untuk bisa mengendalikan harga
Perfect Knowledge
We also assume that households

and firms possess all the information
they need to make market choices.
Pengetahuan sempurna asumsi bahwa
rumah tangga memiliki pengetahuan
tentang kualitas dan harga segala
sesuatu yang tersedia di pasar dan
bahwa perusahaan memiliki semua
informasi yang tersedia menyangkut
tingkat upah , biaya modal , dan harga
output
Household Choice in Output Markets
Every household must make 3

keputusan dasar :
1. Berapa banyak tiap produk , atau
output , yang diminta .
2. Berapa tenaga kerja yang akan
ditawarkan .
3. Berapa banyak yang akan
dibelanjakan hari ini dan berapa
banyak yang akan dtabung untuk
masa depan .
Determinants of Household Demand (review)
Beberapa faktor mempengaruhi kuantitas barang

dan jasa tertentu yang diminta oleh suatu rumah
tangga :
Harga produk
Pendapatan yang diterimah rumah tangga
Jumlah akumulasi kekayaan rumah tangga
Harga produk lain yang tersedia bagi rumah tangga
Selera dan preferensi rumah tangga
Ekspektasi rumah tangga terhadap kekayaan , harga , dan

pendapatan di masa depan
The Budget Constraint
Batasan anggaran batasan atas pilihan

rumah tangga karena pendapatan ,
kekayaan , dan harga produk
Serangkaian pilihan atau serangkaian
oportunitas serangkaian pilihan yang
didefenisikan dan dibatasi oleh anggaran
atau kendala anggaran
A budget constraint
separates those
combinations of goods and
services that are available,
given limited income, from
those that are not. The
available combinations
make up the opportunity
set.
Choice Set or Opportunity Set
Possible Budget Choices of a Person Earning $1,000 Per

Month After Taxes
MONTHLY OTHER
OPTION RENT FOOD EXPENSES TOTAL AVAILABLE?
A $ 400 $250 $350 $1,000 Yes
B 600 200 200 1,000 Yes
C 700 150 150 1,000 Yes
D 1,000 100 100 1,200 No
The real cost of a good or service is its opportunity

cost, and opportunity cost is determined by relative
prices.
When a consumers income is allocated

entirely towards the purchase of only two
goods, X and Y, the consumers income
equals:
I X . P X Y . PY
where: I = consumers income
X = quantity of good X purchased
Y = quantity of good Y purchased
PX = price of good X
PY = price of good Y
The Budget Line
The budget line shows the maximum quantity of

two goods, X and Y, that can be purchased with
a fixed amount of income, expressed as Y= f(X).
We can derive the budget I X . P X Y . PY

line by rearranging the I X . P X Y . PY
terms in the income I X .PX
equation, as follows: Y
PY PY
I PX
Budget Line Y X
PY PY
The Budget Line
I PX The Y-intercept of the

Y X budget line shows the
PY PY I
amount of good Y that
can be purchased when P Y
all income is spent on
good Y.
The slope of the

PX
budget line equals the
ratio of the goods PY
prices.
The Budget Line
This is the budget

constraint when
income equals $200
dollars per month, the
price of a jazz club
visit is $10 each, and
the price of a Thai
meal is $20.
One of the possible
combinations is 5 Thai
meals and 10 Jazz
club visits per month.
The Budget Line
Point E is
unattainable, and
point D does not
exhaust the entire
income available.
The Budget Line
A decrease in the
price of Thai meals
shifts the budget line
outward along the
horizontal axis.
The decrease in the
price of one good
expands the
consumers
opportunity set.
The Basis of Choice: Utility
Utilitas kepuasan atau imbalan

yang dihasilkan suatu produk
dibandingkan dengan
alternatifnya merupakan dasar
menentukan pilihan
Utilitas marjinal kepuasan

tambahan yang diperoleh
dengan mengkonsumsi atau
menggunakan tambahan satu
unit .
Diminishing Marginal Utility
Hukum utilitas marjinal

yang semakin menurun :
Semakin banyak suatu
barang yang dikonsumsi
pada periode tertentu ,
semakin sedikit kepuasan
(utilitas) yang dihasilkan dari
mengkonsumsi tiap unit
tambahan (marjinal) barang
yang sama
Diminishing Marginal Utility
Total Utility and Marginal Utility of

Trips to the Club Per Week
TRIPS TO MARGINAL
CLUB TOTAL UTILITY UTLITY
0 0
1 12 12
2 22 10
3 28 6
4 32 4
5 34 2
6 34 0
Total utility increases

at a decreasing rate,
while marginal utility
decreases.
The Utility-Maximizing Rule
Utility-maximizing consumers spread out

their expenditures until the following
condition holds:
M U M U
X
Y
PX PY
where: MUX = marginal utility derived from the last unit
of X consumed.
MUY = marginal utility derived from the last unit
of Y consumed.
Y = quantity of Y purchased
PX = price of good X
PY = price of good Y
Allocation of Fixed Expenditure Per Week Between
Two Alternatives
(5)
(1) (2) (3) (4) MARGINAL
TRIPS TO CLUB PER TOTAL MARGINAL PRICE UTILITY PER
WEEK UTILITY UTILITY (MU) (P) DOLLAR (MU/P)
1 12 12 $ 3.00 4.0
2 22 10 3.00 3.3
3 28 6 3.00 2.0
4 32 4 3.00 1.3
5 34 2 3.00 0.7
6 34 0 3.00 0
(1) (2)
BASKETBALL TOTAL (3) (4) (5)
GAMES PER WEEK UTILITY (MU) (P) (MU/P)
1 21 21 $ 6.00 3.5
2 33 12 6.00 2.0
3 42 9 6.00 1.5
4 48 6 6.00 1.0
5 51 3 6.00 .5
6 51 0 6.00 0
Diminishing Marginal Utility and Downward-
Sloping Demand
Diminishing marginal
utility helps to explain
why demand slopes
down.
Marginal utility falls
with each additional
unit consumed, so
people are not willing
to pay as much.
Income and Substitution Effects
Price changes affect households

in two ways:
Efek pendapatan :
Consumption changes
because purchasing power
changes.
Efek substitusi : Consumption
changes because opportunity
costs change.
The Income Effect of a Price Change
Ketika harga suatu produk yang

kita beli itu turun , kita merasa
beruntung
Ketika harga suatu produk yang
kita beli itu naik , kita merasa
rugi .
The Substitution Effect of a Price Change
Ketika suatu harga produk itu

turun , that product becomes
more attractive relative to
potential substitutes.
Ketika suatu harga produk itu

naik , that product becomes less
attractive relative to potential
substitutes.
Income and Substitution Effects of a Price
Change
Harga barang
atau jasa
Rumah tangga Rumah tangga
Efek
merasa lebih membeli lebih
pendapatan
untung banyak
turun
Biaya Rumah tangga

Efek
oportunitas membeli lebih
substitusi
barang turun sedikit
Rumah tangga Rumah tangga

Efek
merasa lebih membeli lebih
Naik rugi
pendapatan
sedikit
Biaya Rumah tangga

Efek
oportunitas membeli lebih
substitusi
barang naik banyak
Consumer Surplus
Surplus konsumen
selisih antara jumlah
maksimal yang
bersedia dibayarkan
oleh seseorang atas
suatu barang dengan
hara pasarnya saat ini
Consumer surplus
measurement is a key
element in cost-
benefit analysis.
The Diamond/Water Paradox
suatu paradoks berlian / air yang

menyatakan bahwa :
1. Barang yang nilai kegunaanya paling

besar sering memiliki nilai tukar yang
kecil atau tidak sama sekali
2. Barang yang memiliki nilai tukar paling

besar sering memiliki nilai kegunaan
yang kecil atau tidak sama sekali .
Household Choice in Input Markets
Seperti dalam pasar output , rumah tangga menghadapi
pilihan yang terbatas dalam pasar input . Mereka harus
memutuskan :
1. Apakah akan bekerja
2. Seberapa banyak harus bekerja
3. Jenis pekerjaan apa yg akan
diakukan
pada dasarnya , anggota rumah tangga harus

memutuskan berapa banyak tenaga kerja yang akan
ditawarkan . Pilihan yang mereka ambil dipengaruhi
oleh :
1. Ketersediaan lapangan kerja
2. Tingkat upah di pasar
3. Keterampilan yang mereka miliki
The Price of Leisure
The wage rate can be thought of as the

priceor the opportunity cost of the
benefits of either unpaid work or leisure.
The decision to enter the workforce

involves a trade-off between wages (and
the goods and services that wages will
buy) on the one hand, and leisure and the
value of nonmarket production on the
other.
The Labor Supply Curve
Kurva penawaran tenaga

kerja suatu diagram yang
memperlihatkan kuantitas
tenaga kerja yang
ditawarkan pada tinkat upah
yang berbeda-beda .
Bentuknya tergantung pada
bagaimana rumah tangga
bereaksi terhadap
perubahan tingkat upah
Income and Substitution
Effects of a Wage Change
An increase in the wage rate affects households in

two ways, known as the substitution and income
effects.
The substitution effect of a
higher wage means that the
opportunity cost of leisure is
now higher. Given the law of
demand, the household will
buy less leisure.
When the substitution effect
outweighs the income effect,
the labor supply curve slopes
upward.
Income and Substitution
Effects of a Wage Change
An increase in the wage rate affects households in two

ways, known as the substitution and income effects.
The income effect of a

higher wage means that
households can now afford to
buy more leisure.
When the income effect

outweighs the substitution
effect, the result is a
backward-bending labor
supply curve.
Saving and Borrowing: Present Versus
Future Consumption
Households can use

present income to
finance future spending
(i.e., save), or they can
use future funds to
finance present spending
(i.e., borrow).
Saving and Borrowing: Present Versus
Future Consumption
An increase in the interest rate also has

substitution and income effects, as follows:
Income effect: Households will now

earn more on all previous savings, so
they will save less
Substitution effect: The opportunity
cost of present consumption is now
higher; given the law of demand, the
household will save more.

Household Behavior and Consumer Choice

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CHAPTER 5

Household Behavior and

Prepared by: Fernando

Supply in output Capital

A key assumption in the study of household and

Persaingan sempurna struktur industri dimana ada

We also assume that households

Every household must make 3

Beberapa faktor mempengaruhi kuantitas barang

Pendapatan yang diterimah rumah tangga

Jumlah akumulasi kekayaan rumah tangga

Harga produk lain yang tersedia bagi rumah tangga

Selera dan preferensi rumah tangga

Ekspektasi rumah tangga terhadap kekayaan , harga , dan

Batasan anggaran batasan atas pilihan

Possible Budget Choices of a Person Earning $1,000 Per

The real cost of a good or service is its opportunity

When a consumers income is allocated

The budget line shows the maximum quantity of

We can derive the budget I X . P X Y . PY

I PX The Y-intercept of the

The slope of the

This is the budget

Utilitas kepuasan atau imbalan

Utilitas marjinal kepuasan

Hukum utilitas marjinal

Total Utility and Marginal Utility of

Total utility increases

Utility-maximizing consumers spread out

Price changes affect households

Ketika harga suatu produk yang

Ketika suatu harga produk itu

Ketika suatu harga produk itu

Biaya Rumah tangga

Rumah tangga Rumah tangga

Biaya Rumah tangga

suatu paradoks berlian / air yang

1. Barang yang nilai kegunaanya paling

2. Barang yang memiliki nilai tukar paling

pada dasarnya , anggota rumah tangga harus

The wage rate can be thought of as the

The decision to enter the workforce

Kurva penawaran tenaga

An increase in the wage rate affects households in

An increase in the wage rate affects households in two

The income effect of a

When the income effect

Households can use

An increase in the interest rate also has

Income effect: Households will now

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