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Chapter 6

Chapter 6- Consumer Behaviour.docx

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Department
Economics
Course Code
ECO100Y5
Professor
Kalina Staub

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October 23 , 2013 Chapter 6- The Consumer 6.1 Marginal Utility and Consumer Choice Diminishing Marginal Utility  Utility- The satisfaction that a consumer receives from consuming some g/s  Total Utility- Total satisfaction from consuming given commodity by consumer  Marginal Utility- Additional satisfaction resulting from consuming one more of a g/s  Law of Diminishing Marginal Utility- Utility that any consumer derives from successive units of particular product consumed over some period of time diminishes as total consumption of product increases (consumption of all other products= constant) Utility Schedules and Graphs Number of Oreos Marginal Utility Total Utility 0 0 1 6 6 2 6 12 3 5 17 4 5 22 5 2 24 6 1 25 7 0 25 Total Utility Marginal Utility 30 8 6 20 Total 4 Marginal 10 Utility 2 Utility 0 0 1 2 3 4 5 6 7 8 1 2 3 4 5 6 7 Total utility ^ increasing but @ decreasing rate Marginal utility ^ decreasing Maximizing Utility The Consumer’s Decision  Consumers want to maximize their total utility subject to their constraints (eg. Income and market prices of various products)  Example- Consumer has $1000 to spend on ipods ($50) or ipads ($200): 1. 6A.1- Indifference curves  Indifference theory- Consumers can always say which of two consumption bundles they prefer without having to pay by how much they prefer it October 23 , 2013  Bundles in which a person is indifferent means that all bundles give an individual equal satisfaction/utility; A curve for each point of utility  The consumer is indifferent between the combinations indicated by any two points on one indifference curve  Any point above an indifference curve is preferred to any point along that same indifference curve; any point on the curve is preferred to any point below it  Diminishing Marginal Rate of Substitution  The slope of each curve examines how much of one good to give away to get other good; decreases along an indifference curve(deceases opportunity cost)  Two assumptions of indifference theory: o Algebraic value of the MRS between two goods is always negative  To increase consumption of one good means being prepared to decrease consumption of second good  Represented by the negative slope of indifference curves o Diminishing MRS is second assumption of indifference theory  The less of product A and the more of second product B, that consumer already has, the smaller the amount of A that the consumer will be willing to give up to get one additional unit of B; MRS changes when the amounts of two products consumed change  The Indifference Map- PREFERENCES OF CONSUMERS  The further away the curve is from origin, the more utility increases; higher the indifference curve= more utility consumer gets  Specifies consumer’s tastes by showing rate on substitution between the two products for every possible level of current consumption of these products  When economists say that a consumer’s tastes are given, they do not mean that the consumer’s current consumption pattern is given; rather, they mean that the consumer’s entire indifference map is given October 23 , 2013 2. 6A.2- The Budget Line, Budget constraints- POSSIBILITIES AVAILABLE TO CONSUMER  Shows all the combinations of two products consumer can or cannot afford buy if they spend a fixed amount of money  Straight line since there are only two products  Properties of a budget line: 1. Points on the budget line indicate bundles of products that use up the consumer’s entire income 2. Points between the budget line and the origin indicate bundles of products that cost less than the consumer’s income 3. Points above the budget line indicate combinations of products that cost more than the consumer’s income  The Slope of the Budget Line  Numerical value of the slope indicated how much of one good must be given up to obtain an additional unit of the other  The opportunity cost of food in terms of clothing is measured by the (absolute value of the) slope of the budget line, which is equal to the relative price ratio 3. 6A.3- The Consumer’s Utility Maximization Choices- WHAT CONSUMERS WILL ACTUALLY DO  Preferences + constraints = Maximize utility  The consumer’s utility is maximized at the point where an indifference curve is tangent to the budget line; at that point, the consumer’s marginal rate of substitution for the two goods is equal to the relative prices of the two goods  If consumer values goods differently from the way the market does, there is room for profitable exchange; can give up some of the good that consumer values relatively less than the market does and take in return some of the good that he values relatively more than the market does
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