KINH TẾ VI MÔ Chapter 4 for student

CHAPTER 4
THEORY ON CONSUMER’S BEHAVIOR

Content
Theory on consumer’s utility
The principle of diminishing marginal utility
Consumer’s surplus
Consumer’s preferences
Budget constraint
Utility maximizing choice

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I. Theory on consumer’s utility
1. Some definitions
1.1. Utility (U)
-

The benefit or satisfaction that a person gets
from the consumption of a good or service
An abstract concept
Unit – free
Subjectivity (depends on consumer’s
perception)

I. Theory on consumer’s utility
1. Some definitions
1.2. Total utility (TU)
-

-

The total benefit or satisfaction that a person
gets from the consumption of goods and
services
Depends on the person’s level of consumption
– more consumption generally gives more total
utility

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I. Theory on consumer’s utility
1. Some definitions
1.3. Marginal utility (MU)
-

The change in total utility resulting from a one-unit
increase in the quantity of a good consumed

I. Theory on consumer’s utility
2. The principle of diminishing marginal
utility
- In a certain time period, continuous consumption
will tend to the increase in total utility but a
decrease in marginal utility

* Application

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I. Theory on consumer’s utility
3. Consumer’s surplus (CS)
- The difference between P
the market price and the
price buyer is willing to
pay

CS

P*

- The area below demand
curve and above the
market price line

Q

II. Theory on consumer’s choice
1. Consumer’s preferences
- Some assumptions:
+ Preferences do not depend on good’s price or income
+ People can sort all the possible combinations of goods
they might consume into 3 groups: preferred, not
preferred and indifferent
+ Consumers prefer more to less
+ Consumer’s preference is transitivity

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II. Theory on consumer’s choice
1. Consumer’s preferences
A

B

C

D

II. Theory on consumer’s choice
1. Consumer’s
preferences

Movie

Indifference curve:
shows the various
combinations of consumption
quantities that lead to the
same level of well-being or
happiness

Better
A

C
I2

B
I1

Food

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II. Theory on consumer’s choice

1. Consumer’s preferences
Indifference curve’s characteristics
−
-

Downward sloping, the closer to the right
hand-side, the higher utility consumer can gain
Never intersect
∆X.MUx + ∆Y.MUy = 0
→ -MUx / MUy = ∆Y / ∆X
→ -MUx / MUy : the slope of Indifference curve =
The marginal rate of substitution (MRS)

II. Theory on consumer’s choice
1. Consumer’s preferences
MRS:

Y

A
B
C
D

X

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II. Theory on consumer’s choice
MRS reveals consumer’s preference toward good
and service
Y

Y

X

X

II. Theory on consumer’s choice
*Special indifference curve
Perfect substitute goods

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II. Theory on consumer’s choice
*Special indifference

curve
Perfect Complement goods

II. Theory on consumer’s choice
2. Budget constraint
- Budget line (BL): shows the various combinations of
consumption that consumer can get from the available
income
Movie
I=PX.QX+PY.QY
(Y)
C
=> QY= I/PY – (PX/PY).QX
A
=> PX/PY : the slope of budget
constraint or price line
B
Area C: can not afford
D
Area D: Inefficient
Food
(X)

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II. Theory on consumer’s choice
2. Budget constraint
- I, PX= const, PY changes

Y

PY decreases:
PY increases:

BL1

X

II. Theory on consumer’s choice
2. Budget constraint
- I, PY= const, PX changes

Y

PX decreases:
PX increases:

BL1
X

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II. Theory on consumer’s choice
2. Budget constraint
- PX, PY= const, I changes

Y

I increases:
I decreases:

BL1
X

II. Theory on consumer’s choice
3. Optimal consumption combination
Y

A

C
D
I3

B
I2
I1
X

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II. Theory on consumer’s choice
3. Utility maximizing choice
- At point C, the indifference curve’ slope is equal to
the budget line’s slope

- In case of many goods and services:

Chapter 4: Review
A consumer decides to spend his income of
200$ on X and Y.
a. PX = 4$, PY = 2$. Draw this consumer’s budget line
b. Due to the decrease in quantity supplied, Y’s price goes
up to 4$. Draw new budget line
c. There is a promotion from the seller. Buying 20 units of Y
at price of 2$, consumer will get 10 units more free of
charge. This is applied on the first 20 units of Y only.
The following units are still applied the price of 2$
(except the bonus). Draw new budget line

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