Consumer Choice Theory : Functional Demand: Lancasters Theory of Consumer Behavior

1
Consumer Choice Theory Functional
DemandLancasters Theory of Consumer Behavior
2
Efficient consumer decision

• How does an economist define an efficient
  consumer decision?

3
Lancasters characteristics model Assumptions

• Similar to the neoclassic model

4
What are we maximizing?

• Neoclassical model?
• Lancasters model?

5
Lancasters assumptions

• Products have objective characteristics
• Consumers can assess the objective characteristic
  content possessed by a specific product
• Consumers have subjective reactions to different
  characteristics

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Consumption technology

• Describe consumption technology

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Determining the efficiency or characteristic
frontier

• A vector from the origin to the point A
  represents the bundle of characteristics
  obtainable if all income is spent on brand A

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Determining the efficiency or characteristic
frontier
Brand Style Comfort SCm Price
S/P Cm/P Point A 9
36 14 9 1 4
a B 24 48
12 24 1 2 b
C 45 45 11
15 3 3 c D
30 15 21 10
3 1.5 d E 40
10 41 10
4 1 e Where SCm is the ratio
of the two characteristics contained in each
shirt P is the market price of each shirt S/P
is the amount of style per dollar contained in
each shirt Cm/P is the amount of comfort per
dollar contained in each shirt
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Determining the efficiency or characteristic
frontier
S/P
5 4 3 2 1 0
Cm/P
1 2 3 4 5 6
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Determining the efficiency or characteristic
frontier

• Define feasible field
• Define efficiency or characteristic frontier

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Optimal Purchase
S/P
5 4 3 2 1 0
E
U1
C
D
A
B
Cm/P
1 2 3 4 5 6
12

• What are the differences between the neoclassical
  model and Lancasters model?

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What are the limitations of Lancasters model?
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Efficiency of Consumer Choice (Sproles,
Geistfeld Badenhop)
Cy
A
C1
U3
B
U2
C
U1
Cx