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Consumer Behavior

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Consumer Behavior & Utility Maximization Chapter 8 Income & Substitution Effects Income Effect- Impact of a product price change on a consumer s real income and on ... – PowerPoint PPT presentation

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Title: Consumer Behavior


1
Consumer Behavior Utility Maximization
  • Chapter 8

2
Income Substitution Effects
  • Income Effect- Impact of a product price change
    on a consumers real income and on quantity
    demanded.
  • Substitution Effect- Impact of a product price
    change and your willingness to buy that product
    as opposed to a substitute item.

3
Utility
  • Satisfaction or pleasure one gets from consuming
    a product.
  • Utility for a product varies from person to
    person
  • Difficult to measure

4
Total Utility Marginal Utility
  • Total Utility- Total amount of satisfaction a
    person derives from consuming some specific
    quantity (I.e. 10 units)
  • Marginal Utility- The extra satisfaction a
    consumer realizes from an additional unit of that
    product. (I.e. going from the 10th unit to the
    11th the difference between the two).

5
Key Graph
Tacos Consumed Total Utility Marginal Utility
0 0 ---
1 10 10
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2
6
Law of Diminishing Marginal Utility
  • Consumers fulfill specific wants with succeeding
    units of a commodity
  • Each added unit provides less utility
    (satisfaction) than the last unit purchased.

7
Theory of Consumer Behavior
  • The typical consumers situation has the following
    dimensions
  • Rational behavior
  • Get most out of their
  • Preferences
  • Clear-cut preferences for goods/services
  • Budget constraint
  • Fixed amount to spend
  • Prices
  • Every good carries a price tag

8
Utility-Maximizing Rule
  • To maximize satisfaction, the consumer should
    allocate his or her income so that the last
    dollar spent on each product yields the same
    amount of marginal utility.
  • Marginal Utility per Dollar- Before applying the
    utility maximizing rule to these data, we must
    put the MU information on a per-dollar-spent basis

9
Utility-Maximizing Table (Income 10 to spend)
Units Marginal Utility (Product A) Price 1 MU Per Dollar (MU/Price) Marginal Utility (Product B) Price 2 MU Per Dollar (MU/Price)
1 10 24
2 8 20
3 7 18
4 6 16
5 5 12
6 4 6
7 3 4
10
Budget Line
  • Schedule or curve that shows various combinations
    of two products a consumer can buy with a
    specific money income.
  • Characteristics
  • Income changes
  • Increase in money income shifts the budget line
    to the right decrease to the left.
  • Price changes
  • Decline in prices of both products shifts the
    curve to the right. Increase in prices of both
    shifts the curve to the left.

11
Budget Schedule
Units of A Price 1.50 Units of B Price 1 Total Expense (Price Units) Add A B Together
8 0 12 (120)
6 3 12 (93)
4 6 12 (66)
2 9 12 (39)
0 12 12 (012)
12
Indifference Curves
  • Shows all combinations of two products that will
    yield the same utility to the consumer

13
Indifference Schedule
Combination Units of A Units of B
J 12 2
K 6 4
L 4 6
M 3 8
14
Indifference Map
  • Series of indifference curves
  • Each curve reflects a different level of total
    utility

15
Consumers Equilibrium Position
  • Budget Line Combinations of products a customer
    can afford
  • Of these combinations, the consumer would prefer
    the combination that provides the greatest
    utility
  • The equilibrium position is the point that is on
    the budget line but on the furthest indifference
    curve
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