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I. Consumer Behavior: Indifference Curve Analysis Consumer Preference Ordering

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Sree Mahalakshmi

The document discusses consumer behavior and how consumers make choices based on preferences and budget constraints. It covers topics like indifference curves, budget lines, changes in prices and income, and how individual demand curves combine to form market demand curves.

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I. Consumer Behavior: Indifference Curve Analysis Consumer Preference Ordering

Uploaded by

Sree Mahalakshmi
49 views14 pages
The document discusses consumer behavior and how consumers make choices based on preferences and budget constraints. It covers topics like indifference curves, budget lines, changes in prices and income, and how individual demand curves combine to form market demand curves.

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Managerial Economics

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chap04

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The document discusses consumer behavior and how consumers make choices based on preferences and budget constraints. It covers topics like indifference curves, budget lines, changes in prices and income, and how individual demand curves combine to form market demand curves.

Copyright:

Attribution Non-Commercial (BY-NC)
Download as PPT, PDF, TXT or read online from Scribd
Download as ppt, pdf, or txt
49 views14 pages

I. Consumer Behavior: Indifference Curve Analysis Consumer Preference Ordering

Uploaded by

Sree Mahalakshmi
The document discusses consumer behavior and how consumers make choices based on preferences and budget constraints. It covers topics like indifference curves, budget lines, changes in prices and income, and how individual demand curves combine to form market demand curves.

Copyright:

Attribution Non-Commercial (BY-NC)
Download as PPT, PDF, TXT or read online from Scribd
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You are on page 1/ 14

Overview

I. Consumer Behavior

Indifference Curve Analysis Consumer Preference Ordering The Budget Constraint Changes in Income Changes in Prices

II. Constraints

III. Consumer Equilibrium IV. Indifference Curve Analysis & Demand Curves

Individual Demand Market Demand


Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999

Consumer Behavior
Consumer Opportunities

The possible goods and services consumer can afford to consume. The goods and services consumers actually consume.

Consumer Preferences

Given the choice between 2 bundles of goods a consumer either

Prefers bundle A to bundle B: A B Prefers bundle B to bundle A: A B Is indifferent between the two: A B
Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999

Indifference Curve Analysis


Indifference Curve

Good Y III. II. I.

A curve that defines the combinations of 2 or more goods that give a consumer the same level of satisfaction.

Marginal Rate of Substitution

The rate at which a consumer is willing to substitute one good for another and stay at the same satisfaction level. Good X
Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999

Consumer Preference Ordering


Completeness

The consumer is capable of expressing a preference for all bundles of goods.

More is Better Diminishing Marginal Rate of Substitution Transitivity


Given 3 bundles of goods: A, B & C. If A B and B C, then A C. If A B and B C, then A C.


Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999

The Budget Constraint


Opportunity Set

The Opportunity Set

The set of consumption bundles that are affordable. PxX + PyY M.


The bundles of goods that exhaust a consumers income.

Budget Line

Budget Line

Px Py

PxX + PyY = M.

Market Rate of Substitution

The slope of the budget line -Px / Py


Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999

Consumer Equilibrium
The equilibrium consumption bundle is the affordable bundle that yields the highest level of satisfaction.
Y
Consumer Equilibrium

III.

II.
I. X
Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999

Changes in the Budget Line


Y

Changes in Income

Increases lead to a parallel, outward shift in the budget line. Decreases lead to a parallel, downward shift.
X Y New Budget Line for a price decrease.

Changes in Price

A decreases in the price of good X rotates the budget line counter-clockwise. An increases rotates the budget line clockwise.

X
Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999

Changes in Price
Substitute Goods

An increase (decrease) in the price of good X leads to an increase (decrease) in the consumption of good Y. An increase (decrease) in the price of good X leads to a decrease (increase) in the consumption of good Y.

Complementary Goods

Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999

Complementary Goods
When the price of good X falls, the consumption of complementary good Y rises.
Y2 Y1 A I 0 X1 X2

Pretzels (Y)

B II

Beer (X)

Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999

Changes in Income
Normal Goods

Good X is a normal good if an increase (decrease) in income leads to an increase (decrease) in its consumption.
Good X is a inferior good if an increase (decrease) in income leads to an decrease (increase) in its consumption.

Inferior Goods

Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999

Normal Goods
An increase in income increases the consumption of normal goods.
Y

B A I 0
Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999

II

Individual Demand Curve


Y

An individuals demand curve is derived from each new equilibrium point found on the indifference curve as the price of good X is varied.

II I $ X

P0

P1
X0 X1

D
X

Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999

Market Demand
The market demand curve is the horizontal summation of individual demand curves. It indicates the total quantity all consumers would purchase at each price point.
$ 50
40

Individual Demand Curves

Market Demand Curve

D1 1 2

D2 Q 1 2 3

DM Q

Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999

A Classic Marketing Application


Other goods (Y) A C D I E II

A buy-one, get-one free pizza deal.

0.5

Pizza (X)

Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999

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