KINH TẾ VI MÔ Chapter 3 microeconomics 2015 consumers behaviour

11/18/2015

Overview
Theories of consumer behavior
Explanation of how consumers allocate income to purchase
different goods and services (market basket)
 Utility Theory
 Theory of Consumer Choice

The Theories of
Consumer Behavior
MICROECONOMICS
Chapter 3

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Utility- U
Utility (U) is the satisfaction or pleasure that a consumer
gets from consuming a given bundle of goods or service
(market basket)





1. Utility

A market basket is a collection of one or more commodities

Characteristics of U






Chapter 3


a numerical indicator of a person’s satisfaction
If one item is preferred to some alternative, the utility from the
item is greater than the alternative.
Actual unit of measurement for utility is not important (ordinal,
not cardinal, ranking is sufficient)


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Consumers try to obtain the largest possible total satisfaction (utility)
from the market basket that they buy with their incomes.
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E.g. Utility for cookies

Marginal Utility (MU)

U can be shown in table or function







5

1

9

2

16

3

21

4

24

5

22

Marginal utility -MU
Utility

1

9

-

2

16

7

3

21

5

4

24

3

5

22

-2

7



How much happier is individual from consuming one more unit
of coffee

The change in total utility due to a one-unit change in the
quantity of a good or service



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Number
of
cookies

MU measures additional satisfaction obtained from

consuming 1 additional unit of goods or service.



Utility Table
Utility Function: Formula that assigns level of utility to
individual market baskets
Number of
Utility
U = f (X)
cookies

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Principle of Diminishing Marginal Utility

MU

MU 

U
 U '( x)
X



As more good is consumed, additional utility
consumer gains will be smaller and smaller.



Note: total utility will continue to increase since
consumer makes choices that make them happier.

Observation: Marginal
Utility is diminishing as
consumption increase.

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Application 1: Diminishing Marginal Utility
and Demand curve
P, MU

Willingness to Pay:







The maximum price that a buyer is willing and able to pay for a good.
Measures how much the buyer values the good or service.

MU1
MU2
MU3

To a consumer, the larger marginal utility, the higher
willingness to pay; The smaller MU, the lower willingness
to pay.
The diminishing marginal utility explains the slope
downward demand curve.





MUn

O

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Application 2: Diminishing Marginal Utility
and Consumer surplus


Consumer Surplus: the maximum amount a consumer will
be willing to pay for a good depends upon the expected
utility (benefits) of that good.




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CS = MUx – Px
A lower market price will increase consumer surplus
A higher market price will reduce consumer surplus

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D (MU)

X1

X2

Xn

X3

10

X

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E.g.
P= $3/pc
CS1 = 9 – 3 = 6
 CS2 = 7- 3 = 4
 CS3 = 5 - 3 = 2
 CS4 = 3 - 3= 0
 CS= CS1 + CS2 + CS3 = 12



12

Number
of
cookies

Utility

MU

1

9

-

2

16

7

3

21

5

4

24

3

5

22

-2

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E.g: Consumer Surplus

Consumer Surplus: Graphical
P, MU
CS: area
A
below the
demand
curve and
above the
market price P*
line.
 At P*:
CS = AP*E*

P


9

CS

7
5

3

CS
E*
D (MU)

O
1

2

13

3

4

Q*

Q

Q

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TU -Total Utility




TU -Total Utility: is the satisfaction or pleasure that a
consumer gets from consuming some market baskets

E.g.: Baskets (X-Coffee;Y-Sweets)
Total Utility Function:





2. Theory of Consumer’s Choice

U = X.Y
U = X1/2.Y1/2

Consumer’s choice: Maximizing Total Utility  Umax

Three steps:
1. Consumer Preference
2. Budget Constraint
3. Given preferences and limited incomes, what amount of goods will be purchased?

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Consumer Preferences – Basic Assumptions



Example

Individuals can choose between market baskets
containing different goods based on their preference.
Three basic assumptions:
(1) Preferences are complete.


If prefer A to B, and B to C, the must prefer A to C

(3) Consumers always prefer more of any good to less.


Units of Food

Units of Clothing

A

20

30

B

10

50

D

40

20

E

30

40

G

10

20

H

10

40

Consumers can rank market baskets

(2) Preferences are transitive.


Market Basket

More is better

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Example

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Consumer Preferences

Clothing50

The consumer prefers
A to all combinations
in the yellow box, while
all those in the pink
box are preferred to A.

B

40

H

30

E
A




Consumer preferences can be represented graphically
using indifference curves
Indifference curves represent all combinations of market
baskets that the person is indifferent to


20

D

G



A person will be equally satisfied with either choice
Same level of Utility.

10

10

19

20

30

40

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Food

20

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Indifference Curves: Example
Clothing

B

50
40

H

E

Indifference Map

•Indifferent between B,
A, & D
•E is preferred to U1
•U1 is preferred to H & G

Clothing

A

30

B

50

E

40
D

20

A

30

U1

G

10
20

30

40

Food

U2

G

10

U1
10
21

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Indifference Curves: Characteristics






40

Food

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Y 50

MRS = 2

30

We measure how a person trades one good for another using the marginal rate
of substitution (MRS)

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MRS   Y

U*
10

Along an indifference curve there is a diminishing marginal rate of substitution
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MRS = 1
D

10

As more of one good is consumed, a consumer would prefer to give up fewer
units of a second good to get additional units of the first one

24

X

A

20

The MRS decreases as we move down the indifference curve


B

40

Violates assumption that more is better
Why? What if we assume they can cross

Indifference curves are convex




If it sloped upward it would violate the assumption that more is preferred to less.
Some points that had more of both goods would be indifferent to a basket with
less of both goods

The shapes of indifference curves describes how a consumer is willing to
substitute one good for another




30

Tỷ lệ thay thế cận biên- MRS

Indifference curves can not cross




20

22

Indifference curves slope downward to the right.




U3

D

20
10

To describe preferences
for all combinations of
goods/services, we
have a set of
indifference curves – an
indifference map

20

30

40

X

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MRS

Quiz

Giả sử hàm ích lợi U = f(X,Y)



dU
dU
dU  0 
X 
Y  0
dX
dY
 MU x X  MU Y Y  0


b.
c.

Caculate MRS in the following functions:
U = X + 2Y
U = X1/2.Y1/2
U = X0.3.Y0.7

Y MU X

X MU Y

 MRS 
25

MU X
MU Y
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Marginal Rate of Substitution


a.

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Consumer Preferences

Perfect Substitutes



Two goods are perfect substitutes when the marginal rate of
substitution of one good for the other is constant.
Example: a person might consider apple juice and orange juice
perfect substitutes


Apple
4
Juice
(glasses)

Perfect
Substitutes

3

They would always trade 1 glass of OJ for 1 glass of Apple Juice

2

1
0
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1

2

3

4

Orange Juice
(glasses)

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Consumer Preferences


Consumer Preferences

Perfect Complements



Two goods are perfect complements when the indifference
curves for the goods are shaped as right angles.
Example: If you have 1 left shoe and 1 right shoe, you are
indifferent between having more left shoes only


Left
Shoes

Perfect
Complements

4
3

Must have one right for one left

2
1
0
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Budget Constraints








3

4

Right Shoes

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Budget Constraints
Market
Basket

Indicates all combinations of two commodities for which total
money spent equals total income.
We assume only 2 goods are consumed, so we do not consider
savings

Let F equal the amount of food purchased, and C is the
amount of clothing.
Price of food = PF and price of clothing = PC
Then

31

2

30

The Budget Line


1

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Clothing
PC = $2
40

I = PFF + PCC

A

Food
PF = $1
0

Income
$80

B

20

30

$80

D

40

20

$80

E

60

10

$80

G

80

0

$80

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The Budget Line

The Budget Line - Changes


Clothing

(I/PC) = 40

PFF  PCC  I

A
B

30

Slope 

10
20

D

C
1
PF
 - F
2
PC

The Effects of Changes in Income





An increase in income causes the budget line to shift outward,
parallel to the original line (holding prices constant).
Can buy more of both goods with more income
A decrease in income causes the budget line to shift inward,
parallel to the original line (holding prices constant).

Can buy less of both goods with less income

20
E

10
G
0

20

40

60

33

80 = (I/PF)

Food

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The Budget Line - Changes in Income
Clothing
(units
per week)

The Budget Line - Changes in Price
Clothing
(units
per week)

A increase in
income shifts
the budget line
outward

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A decrease in the
price of food to
$.50 changes
the slope of the
budget line and
rotates it outward.

60
40
20 BL3
(I =
$40)

0
35

40

BL1
(I = $80)

80

120

L3

BL2
(I = $160)

160
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An increase in the
price of food to
$2.00 changes
the slope of the
budget line and
rotates it inward.

40

A decrease in
income shifts
the budget line
inward

Food

(PF = 2)

(units per week)
36

L2

L1

(PF = 1/2)

(PF = 1)
40

80

120

160

Food

(units per week)

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Consumer Choice




Consumer Choice

Consumers choose a combination of goods that will
maximize their satisfaction, given the limited budget
available to them.
The maximizing market basket must satisfy two
conditions:





At consumer’s optimal consumption point,
Y

40
A

It must be located on the budget line.
It must give the consumer the most preferred combination of
goods and services.

30

PF
MRS 
PC

D

20

C
U3
U1

B
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Quiz 2








Which of the following bundles could not lie on the same

indifference curve with A and B and satisfy the four properties
of indifference curves?
a. One movie and five books
b. Three movies and three books
c. Five movies and one book
d. One movie and seven books
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FTU
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80

X

One consumer uses his income of $60 for consuming 2
commodities X and Y . Prices of X is $3 and price of Y is
$1,




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Quiz 3

Consumer has preferences over two goods: books and movies.
Two bundles, which lie on the same indifference curve for this
consumer, are shown in the table below.




0

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


Utility function of this person is U = X.Y

a. What is the budget line function of this consumer?
b. What is the optimum basket?
c. Graph out the result.

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