KINH TẾ VI MÔ Consumer behaviour

CHAPTER 4: THE RATONAL
CONSUMER
Nguyen Thi Minh Thu, FIE, FTU

1


2

THE THEORY OF CONSUMER
BEHAVIOUR

I. CONSUMER SURPLUS
II. CONSUMER CHOICE

Nguyen Thi Minh Thu, FIE, FTU


Consumer surplus
Price
$399

An

Potentia
l buyers
Bình

349

Chi

300

Dương

250

D
0

1

2

3

4

5

An
Binh

$399

Chi
Dương

300

Đạt

100

349
250

A consumer’s willingness to
pay for a good is the
maximum price at which he
or she would buy that good.

Đạt

100

Willingne
ss to pay

Quantity

Graphically, the TWTP is the
area below the demand curve.


Price
A’s net gain:
$399 − $270 = $129
$399

A

B’s net gain:
$349 − $270 = $79

349

B

C’s net gain: $300 −
$270 = $30
C

300
270

Price = $270

250

D

100

Those individual net
gains are known as
individual consumer
surpluses.

Đ

D
0

1

2

3

4

5

Quantity


Consumer Surplus
Individual Consumer surplus is the net gain to a
buyer from the purchase of a good.
It is equal to the difference between the buyer’s
willingness-to-pay and the expense.
Total consumer surplus is the sum of the individual
consumer surpluses of all the buyers of a good.

CS = TWTP - TE


Consumer Surplus

Price of
iPad

The total willingness-to-pay is
equal to the area below the
demand curve.
TWTP

$500

D
0

1 million

Quantity of iPads


Consumer Surplus

Price of
iPad

The
total
consumer
surplus
generated by purchases of a good
at a given price is equal to the area
below the demand curve but above

that price.

Consum
er
surplus
$500

Price = $500

TE
0

D
1 million

Quantity of iPads


10

CONSUMER CHOICE
1. INDIFFERENCE CURVE
2. BUDGET CONSTRAINT
3. OPTIMAL CHOICE
4. INCOME EFFECT AND
SUBSTITUTION EFFECT

Nguyen Thi Minh Thu, FIE, FTU

11

1. INDIFERENCE CURVE
The utility of a consumer is a measure of the
satisfaction

the

consumer

derives

from

the

consumption of goods and services
A utility function gives the total utility generated by a
consumption bundle.
The unit of utility is a util.
Nguyen Thi Minh Thu, FIE, FTU


12

KEY DEFINITIONS
Marginal utility is the change in total utility resulting
from the consumption of an extra unit.

If the total utility function is continuous:

MU = TU’(Q)

Nguyen Thi Minh Thu, FIE, FTU


13

CALCULATING MARGINAL
UTILITY
Q

TU

MU

0

0

-

1

10

10

2

18

8

3

24

6

4

28

4

Nguyen Thi Minh Thu, FIE, FTU


CALCULATING MARGINAL
UTILITY
Eg1: TU = 20Q – Q2
⇒MU = TU’ = 20 – 2Q

 Eg2: TU = XY
⇒MUX = TU’ (X) = Y
MUY = TU’ (Y) = X

Nguyen Thi Minh Thu, FIE, FTU

14

15

THE LAW OF DIMINISHING
MARGINAL UTILITY
A psychological observation
As a consumer consumes more and more units

MU

of a specific commodity in a certain period of
time, utility from the successive units goes on
diminishing.

10
8
6
4
MU

0

Nguyen Thi Minh Thu, FIE, FTU

1

2

3

4

Q


BASIC ASSUMPTIONS
1. Complete preferences
2. Transitivity
3. Non-satiation (prefer more to less)

Nguyen Thi Minh Thu, FIE, FTU

16


INDIFFERENCE CURVE
Indifference
curves
capture
all
combinations of commodities that yield
the same level of utility.
Suppose that a person consumes two
goods, i.e. X and Y.

Nguyen Thi Minh Thu, FIE, FTU

17

18

INDIFFERENCE CURVE
Properties of Indifference curves

The farther from the origin an IC

Y

is, the higher utility it displays.

Y1

U1
0

Nguyen Thi Minh Thu, FIE, FTU

X1

X2

U2
X


19

INDIFFERENCE CURVE

ICs never cross each
other

Y

A

U1
U2

Nguyen Thi Minh Thu, FIE, FTU

0

X


20

INDIFFERENCE CURVE
 When an individual consumes more
units of good X, he/she can reduce the
amount of good Y while enjoy the
same level of utility.
 ICs slope downward.

Nguyen Thi Minh Thu, FIE, FTU


INDIFFERNCE CURVE

21

Marginal

rate of substition of good X for good Y,
denoted as MRSXY, reflects the amount of good Y the
consumer has to give up to consume an extra unit of
good X holding the same level of utility.

Y

Y1

A
ΔY
B

Y2
ΔX
0

Nguyen Thi Minh Thu, FIE, FTU

X1

X2

IC
X

22

INDIFFERENCE CURVE
Moving from A to B:
Changes in the amounts of X and Y is ΔX and ΔY

Y

Change in total utility
= Marginal utility × Change in quantity.

Y1

A
ΔY
B

Y2
ΔX
0

Nguyen Thi Minh Thu, FIE, FTU

X1

X2

IC

X


23

INDIFFERENCE CURVE
ΔTUX = MUX * ΔX

Y

ΔTUY = MUY * ΔY
ΔTU = ΔTUX + ΔTUY = 0
MUX * ΔX+ MUY * ΔY=0(1)

Y1

A
ΔY
B

Y2
ΔX
0

Nguyen Thi Minh Thu, FIE, FTU

X1

X2

IC
X


24

INDIFFERENCE CURVE
From equation (1), we have

IC’s slope =
Nguyen Thi Minh Thu, FIE, FTU


INDIFFERENCE CURVE
Marginal rate of substitution of good X for good Y
decreases as the consumer consumes more of good X
⇒|ΔY/ΔX| negatively covariates with X
⇒ΔY/ΔX positively covariates with X
⇒ Y’(X) positively covariates with X
⇒ Y’’ >0
⇒ICs bow inward.
Nguyen Thi Minh Thu, FIE, FTU

25


26

TWO EXTREME CASES
PERFECTLY COMPLEMENTS

PERFECTLY SUBSTITUTES

Y

0
Nguyen Thi Minh Thu, FIE, FTU

Y

X

0

X


BUDGET LINE
A budget constraint requires that the
cost of a consumer’s consumption bundle
be no more than the consumer’s total
income.
Suppose we have a consumer with
income I to spend on two commodities X
and Y with price PX, PY correspondingly.
Nguyen Thi Minh Thu, FIE, FTU

27