Demand analysis of televisions owership in vietnam

University of Economics

Institute of Social Studies

Ho Chi Minh City

The Hague

Vietnam

The Netherlands

VIETNAM- THE NETHERLANDS PROGRAMME FOR
MASTER OF ARTS IN DEVELOPMENT ECONOMICS

DEMAND ANALYSIS OF TELEVISIONS OWNERSHIP IN
VIETNAM

A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF
THE REQUIREMEN1S FOR THE DEGREE OF

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, SEPTEMBER 2003


University of Economics
Ho Chi Minh City

Institute of Social Studies
The Hague

Vietnam

The Netherlands

VIETNAM- THE NETHERLANDS PROGRAMME FOR MASTER
OF ARTS IN DEVELOPMENT ECONOMICS

DEMAND ANALYSIS OF TELEVISIONS OWNERSHIP IN
VIETNAM

A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF
THE REQUIREMENTS IDR THE DEGREE OF

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

Student:
Supervisor:

HO CHI MINH CITY, SEPTEMBER2003

LE QUOC THANH
NGUYEN HUU LOC


CERTIFICATION

"I certifY that the substance of this thesis has not yet been submitted for any degree and is
not being currently submitted for any other degrees.

I certify that to the best my knowledge, any help received in preparing this thesis, and
sources used, have been acknowledged in this thesis".

Le Qu6c Thanh
September 8, 2003

i


ACKNOWLEDGEMENT
Today, my thesis has been completed for official submission. In order to complete
the thesis; I have duly received many enthusiasm supports from many people. I,
therefore, would like to be thankful to all of them, especially the following people.
Firstly, I would like to express my thanks to my supervisor, Mr. Nguyen Huu Loc
who has advised me a lot of valuable recommeniation to improve the thesis.
Secondly, the special thanks shall be devoted to Dr. Haroon Akram Lodhi, Project
Leader of the Vietnam-Dutch MA programmes, for his teaching works, especially for
very useful topic: Research Methodology that seems to be unique in Vietnam so far.
I would like to thank all teachers and staff of the Project such as Mr. Tran Vo

Hung Son - Project Director, Mdm. Nguyet, the Project secretary and Mdm. Chi, the
Project librarian
The special thanks is duly devoted to Dr. Karel Jansen, Dr.Youdi Schipper, not
only for the teaching works, but also for granted scholarships which is contributed by
Dutch people. Thank to the contribution of Dutch people, many Vietnamese students and
I have chance to access very academic ccurse in development economics.

Finally, I am deeply indebted to my family members such as my parents and my
wife who always encourage me during the studying.
Ho Chi Minh City, September 8, 2003.

Le Quoc Thanh

ii


ABBREVIATION

AFfA

: Asian Free Trade Area

CEPT

: Common Effective Prefereme Tariff Agreement

FDI

: Foreign Direct Investment

GSO

: General Statistical Office

JN

: Joint Venture

JICA

: Japanese International Cooperation

LPM

: Linear Probability Model

SIDA

: The Swedish International Development Agency

TV(s)

: Television sets

VLSS

:Vietnam Living Standards Survey

VND

:Vietnamese Dong (the currency unit ofVietnam)

VElA

: Vietnam Electronics and Informatics Association

VLSS

: Vietnam Living Standard Survey

VCR

: Video Cassette Recorder

WTO

: World Trade Organization

iii


TABLE OF CONTENTS
Certification ........................................................................................................................... i
Acknowledgement ................................................................................................................. ii
Abbreviation .......................................................................................................................... iii
Table of Contents ................................................................................................................... iv
List of tables .......................................................................................................................... v
List of figures and appendices ............................................................................................... vi

CHA.PTER 1: INTRODUCTION ...................................................................................... !
1.1 BACKGROUND OFTHE THESIS ............................................................................... 1

1.2 OBJECTIVE OF THE THESIS ....................................................................................... 4
1.3 SCOPES AND FOCUS OF THE THESIS .................................................................... .4

1.4 DATA COLLECTION AND METIIODOIDGY. ......................................................... .4

1.5 STRUCTURE OF THE THESIS .................................................................................... 5

CHA.PTER 2: TIIEORETICAL FRAMEWORK ............................................................ 6

2.1 SUPPLY- DEMAND .................................................................................................... 6
2.2 DEMAND DETERMINANTS ....................................................................................... 7
2.2.1 PRICES .................................................................................................................. 7
2.2.2 INCOME ................................................................................................................ 11
2.3 THEORY OF CONSUMER'S CHOICES ..................................................................... 14
2.4 HOUSEHOlDS .............................................................................................................. 23
2.5 THE QUAliTATIVE RESPOND MODEL AND DEMAND ANALYSIS .................. 25
2.6 EMPIRICAL STUDIES ................................................................................................. 26

2. 7 CHAPTER REMARKS ..............................•.................................................................. 29

CHAPTER 3: AN OVERVIEW OF VIETNAM'S ELECTRONICS INDUSTRY
AND TELEVISIONS .......................................................................................................... 31
3.1 VIETNAM'S ELECTRONICS INDUSTRY ................................................................. 31
3.1.1 THE HISTORY ................................................................................................... 31

iv


3.1.2 CURRENT SITUATION OF VIETNAM ElECTRONICS INDUSTRY ....... 32
3.2 SUPPLY OFTV FROM DOMESTC PRODUCTION ANDIMPORTATION ........... 34
3.2.1 TELEVISION ASSEMBlERS .............................................................................. 34
3.2.2 DOMESTK:: SUPPLY OFTV AND IMPORTATION ......................................... 36
3.2.3 VIETNAM'S DOMESTIC PRICE IN COMPARISON WITH THE WORLD
PRICE ..................................................................................................................... 37
3.3 ELECTRONICS INDUSTRY ANDGLOBALINTEGRATION ................................ 38
3.4 POLICIES RECOMMENDATION ............................................................................... 38
3.5 STATISTICAL DESCRIPTION OF TV OWNERSHIP IN VIETNAM ...................... 39
3.6 CHAPTERREMARKS .................................................................................................. 41

CHAPTER 4: EMPIRICAL ANALYSIS ......................................................................... 42

4.1 MODELSPECIFICATION ............................................................................................. 42
4.1.1 MODEL SELECTION ........................................................................................... 42
4.1.2 MODEL SPECIFICATION ................................................................................... 44
4.1.3 ANALYTICALFRAMEWORK ...................................................................... 45
4.2 DATA DESCRIPTION .................................................................................................. 47
4.2.1 SOURCEOFDATA ............................................................................................. 47
4.2.2 DATA SAMPLING ............................................................................................... 48
4.3 DESCRIPTIVE STATISTICS ....................................................................................... 48
4.4 RESULT OF ESTIMATION ......................................................................................... 52
4.4.1 MODEL TEST ....................................................................................................... 52
4.4.2 RESULTS OF REGRESSION ............................................................................. 52
4.4.3 COMMENTS ON RESULTS ............................................................................... 53
4.5 CHAPTERREMARKS ................................................................................................. 54

CHAPTER 5: CONCLUSION AND POLICY RECOMMENDATION ........................ 56

5.1 CONCWSION................................................................................................................ 56
5.2 POLICY RECOMMENDATION .................................................................................... 56
APPENDICES
REFERENCES


LIST OFTABLES

Page
Table 2.1 :Alternative market baskets ........................................................... 12
Table 2.2 : Summary of demand responses to a 1% increase in income ..................... 19

Table 2.3 : Estimates of income elasticity of demand in UK ................................. 20
Table 3.1 The share of each electronics product in Vietnam ................................ .33
Table 3.2 Export of electronics product in 1991-1998 ......................................... 33
Table 3.3 List of TV Assemblers in Vietnam ................................................... 35
Table 3.4 Market Share of some biggest TV Assemblers in Vietnam by the year 2000 ... 36
Table 3.5 Supply of TV in Vie1nam market n the year of 1990s ............................ .36
Table 3.6 Tax reduction schedule according to AFfA/CEPT ................................. 38
Table 3.7 Share of Household owning TV in Vietnam in the year 1992 and 1998 ......... 39
Table 3.8 Share of Household owning TV in Vietnam by expenditure quintile in 1998 ..40
Table 3.9 Share of Household owning TV in Vietnam by areas ............................ .40
Table 4.1 Description of variables .............................................................. .47
Table 4.2. Probability of TV ownership across household type ............................. .49
Table 4.3: Probability of TV ownership across regions ...................................... .49
Table 4.4: Probability of TV ownership across Household size.............................. 50
Table 4.5: Probability of TV ownership across Educational Level of Household head ... 51
Table 4.6: The result ofregressions ............................................................... 52

v


LIST OF FIGURES AND APPENDICES

•

FIGURES

Page
Figure 2.1 : Supply and Demand Curve .......................................................... 7
Figure 2.2 : Shits in supply ........................................................................ 8
Figure 2.3: The welfare costs of a tariff.......................................................... 10

Figure 2.4 : Shifts in Demand ..................................................................... 11
Figure 2.5 : An indifference curve ................................................................ 12
Figure 2. 6 : Maximizing consumer satisfaction ................................................. 14
Figure 2. 7 : Income ani substitution effects .................................................... 15
Figure 2.8(a) and 2.8(b) Effect oflncomeChanges ........................................... 17
Figure 2.9 : Engel Curve ........................................................................... 18
Figure 2.10 : Choices of two household faced with binary choice ........................... 21
Figure 2.11 :The derivation of threshold expenditure XT(3) .................................. 22
Figure 4.1 Logit an pro bit cumulative distributions ........................................... .43

Appendix 1: ......................................................................................... 58
Appendix 2: ......................................................................................... 63

vi


CHAPTER 1

INTRODUCTION
1.1 BACKGROUND OF THE THESIS

After over a decade of shifting to the market economy, Vietnam has achieved
considerable successes in the economic development, which resulted in a higher living
standard for Vietnamese. From 1994 to 1999, the nominal monthly income per capita has
increased by 75% (GSO, 2000). By taking the average inflation rate of 6.04% during the
year of 1995-1999 (Vietnam Economics Times, 1999-2000: 4), it might be concluded that
there is considerble increase in real income of people after 5 years of development.
Televisions (here abbreviated as TVs) as a durable goods has become important to
Vietnamese living since television services have rapidly developed nationwide. It allows
people to be accessed to huge source of information, basic knowledge in many fields,

which is very necessary to human being and their business activities. By watching
television, businessmen, companies and manufacturers can update domestic or international
market information, which is quite important to their business. Farmers, especially in
remote areas can learn more about agricultural knowledge through agricultural extension
programmes, animal health care or weather forecasts which make their agricultural
activities become more scientific and less risky, which leads to higher profits as a result.
Children, adults and elderly now may have chances to enjoy appropriate entertainment
programmes that make their life more enjoyable and interesting. In the same manner,
young parents can learn how to take care of their babies through televised children care
programmes. Pupils and students can learn foreign languages, understanding more about
history or geography, etc, inside and outside the country. Obtaining knowledge of these
fields will certainly facilitate their learning process and thus increase their human capital.
In the state management aspect, the Government or state management bodies can

introduce new policies, legal regulation or law in quick and cheap way to people by
televised law programme. Companies and manufacturers can advertise their products,
services to consumers and thus facilitate their sales. Consumers may enjoy open chances to
a wide range of products, which considerably supports their choices. In short, TVs and
television is very important to people's living,

state-mana~ment

works and business

activities as well.

1


As a result of the increase in people's income, according to Begg D. et.al (1991),

the demand for most goods will be increased (Begg D. et.al, 1991: 36). In terms of durable
goods on which the income elasticity of demand is positive, the demand must be higher
according to the increase in the consumers' income. According to the rule of supplydemand, higher demand with unchanged or less supply would lead to increase in price
(Begg D. et.al, 1991:36). In the case of TVs, which are durable goods and cannot be
completely substituted by other products, the price will be increased in response to the
increase in demand This situation may prevent a part of people oflow income groups who
can not afford the increased price from using TVs while it is affordable for them if the price
remain unchanged or proportionally increased with the increase in their income.
Without using TVs, people will lose the chance to improve their lives in of
accessing information, entertainment, basic education and other interesting televised
programmes. Governmental bodies find it difficult to promote legal information, new
policy or law for people understanding. Companies and manufacturers would also find it
difficult to promote their products and services to a part of consumers. In case of a
developing country as Vietnam where 37% of total population is still under poverty line
according to survey of the year 1998 (World Bank, Vietnam Development Report 2000:4),
using TVs will support people to access information for improving human capital, support
policy makers and governmental bodies to introduce policies and related regulations
efficiently. All of these activities will contribute to reduce poverty in Vietnam (Enhancing
Human Capital, World Bank, 2000).
In other words, by using the services of TVs, human capital can be improved or the

labour supply can be higher, potentially increasing production in society as Kooreman
P.(1996) quoted Becker's view "All activities in the households are productive, even
sleeping or watching television" (Kooreman P. et.al, 1996:28). Therefore, the policy
makers should do researches to foresee the demand trend for TV s, so that they could make
appropriate policies to boost production to avoid higher prices so that people of lowincome group can afford to use TVs. In addition, current import tariff for imported TVs, at
60% for complete TVs is too high compared with other countries due to the policy of
import substitution of the Government and thus leads to social losses. This study would
provide a view of TVs demand for policy makers to consider new import tariff to be close
to optimal one so that the cost of import would be equal to its benefit (Begg D. et.al,

2


1991:594) and TVs domestic makers will be more efficient due to facing with competition
against overseas makers, leading to an increase in consumer surplus.
For investment aspect, the increase in demand would lead to larger market for
current producers having better chances for expanding production or penetration for new
comers to the market. In order to make investment decisions, quantitative demand analysis
of certain commodity should be carried out to evaluate the possibility of investment.
Considering the context of Vietnam or other developing countries as well, where
human capital should be boosted up to fight the poverty, cheaper TVs will surely support
this process. In other aspects such as domestic or foreign investment, the result of this
research would facilitate the investors to be more confident to invest in TVs production.
This investment could contribute considerably to total investment that is important to the
Vietnam ecooomy.

1.2 OBJECfiVE OF THE THESIS
The thesis is to explore what factors have significant affects on ownership of TV in
Vietnamese households and thus affecting demand of TVs in the whole market of Vietnam.
Based on the found results, the policies would be drawn out, targeting at cheaper TVs
for better chances of household consumption.

1.3 SCOPES AND FOCUS OF THE THESIS
The thesis will focus mainly on demand analysis, household income, household
characteristics that affect demand of durable goods. The thesis is expected to answer the
following sub-questions:

1. What are the important determinants of household demand of TVs?
2. How is the current situation of Vietnam's electronic industry in which TVs as

integrated part and television service of Vietnam as supplementary for using TVs?
3. What policies needed to supports Vietnamese households as consumers and
producers ofTVs in Vietnam?

1.4 DATA COLLECfiON AND METHODOLOGY
As we are interested in examining and finding what factors significantly affect
ownership status of TVs in the Vietnamese household, an econometric modeling approach,

3


specifically logit regression, will be used to deal with the research questions. The model
would probably consist of a single equation in which it is assumed that the ownership of
TV as the dependent variable on the left hand side of the equation. It would depend on the
series of independent variables such as household income, price of TV, and other
characteristics of household and household members. These variables will be considered as
explanatoty variable(s) on the right hand side.
Data extracted from VLSS will be used to feed the econometric model. The data from
VLSS 1997-98 will be used due to its advantages in comparison with VLSS 1992-1993
which will be described in the Chapter 4, including sampling method.
In addition to running the econometric analysis of TV ownership, descriptive analysis

of TVs and electronic industry as a whole will be presented by collecting data from other
sources as tertiary data. Television services and electricity industry of Vietnam will be also
described as supplementary factor of TV demand.

1.5 STRUCTURE OF THE THESIS

The Thesis will contain 5 chapters in which the Chapter 1 is the introduction chapter.
Extensive background of the thesis will be presented. How the TVs and Television as

supplemen1ary factor affects people living, people work as the society as the whole.
Problem statement is focused to facilitate the rationale of the study. Data and methodology
of the study are also outlined and included.
Following the Chapter 1 of introduction, the Chapter 2 of theoretical framework will
present the most relevant theories relating to the basic concepts such as demand and supply,
income and price, and household as unit of study including interactions in household that
affect household's decision-making process of consumption. Theory of consumer choices
will be strongly emphasized as the main theory in which household plays the role as
individual consumer subject to the utility maximization rule. The later part of the Chapter is
for discussion of qualitative respond model, which would be considered as basic model for
econometric regression. To support the model building, a number of empirical studies will
be presented and finally all findings of theoretical framewmk will be summed up at the end
of the Chapter.

4


The Chapter 3 will be used to describe an overview of Vietnam electronic industry,
televisions industry and current situation of TV makers in Vietnam, mainly based on data
collected from various sources such as magazines, journal, internet site, past studies.
Current structure of TVs market and operation situation of maker will be presented, aiming
at providing the general picture of TV, electronic industry and televisions. The Chapter will
also present summery of policies, which are collected from various part studies about
Vietnamese electronic industry.
The Chapter 4 as the key part of this Thesis will present the description of data and data
sampling methods for descriptive and econometric analysis. The later part of the chapter
will be the results of econometric regression and final part is the Chapter remarks.
The Chapter 5 will present conclusions, policy implications. Limitation and further
study, which would be suggested is the end of the Chapter.

5


CHAPTER2

THEORETICAL FRAMEWORKS
We start this important chapter by surveying a series of theories in which demand and
supply theory is firstly introduced in Section 2.1 as the fundamental part of this study. By
looking through the demand side, there will be a number of demand determinants, which
would be critically analyzed in Section 2.2, such as price of goods, substitution, consumer's
income, and choices, taste or preferences. The important theory of consumer's choices will
be presented in Section 2.3 to provide a deeper look on another aspect of consumption:
consumer's behavior.
In this study, household will be considered as the unit of analysis and thus household

analysis shall be deeply analyzed as rational consumers subject to budget constraints and
utility maximization. A number of household characteristics such as household's size,
education and age of household's head which usually have significant affects on the decision
of goods consumption will be rapidly discussed in light of household demand In addition,
household is generally a group of people and thus decision-making process and mechanism
within household should also be analyzed with pretty careful proposition. All topics related
to households and household's decision-making process are presented in Section 2.4 of the
Chapter. Section 2.5 will be devoted for analysis and discussion of Qualitative Respond
Model, which is widely used in demand analysis. In order to support for the choice of model
for economic regression in the Chapter 4, a number of empirical studies will be presented and
justified in light of household demand of durable goods in Section 2.6. Section 2.7 as final
part of this Chapter will summarize all available findings and conclusions of this Chapter.

2.1 SUPPLY- DEMAND

Supply and demand concepts are fundamental ones in demand analysis and can be
applied to several economic problems by which we may see how market conditions affect the
supply and demand side of any product or to examine the effect of policy on market, on price
or production. As shown in the simplest diagram below, on which demand and supply
mechanism will be illustrated as the vertical axis show the price level and horizontal axis
show quantity demanded level corresponding to price. The demand curve D intersects with
supply curve at the point A that is called equilibrium point. At the equilibrium point, the

6


market will reach equilibrium status. From this point, we can derive the equilibrium price or
market-clearing price and corresponding quantity demanded.

Price

Pl

Surplus

PO
P2

..........................................

.................

4.h~.rt~g~

i

Quantity

Figure 2.1 : Supply and Demand Curve
(Source: Figure 2.1, Robert S.Pindyck et.al ,1992 : 19)

The supply curve shows how much quantity the producer will be willing to sell at
each price level. Lower prices will make them supply less and vice versa, thus it should slope
upwards so that it represents the producer's behaviors: at higher price level, the producer will
be more aggressive to supply more goods.
The demand curve shows the difference that how much quantity demanded by
consumers at each price level. Higher price will force a part of consumer to choose another
goods to consume or give up consumption of goods. Downward-sloping shape of demand
curve telling us the higher price will depress consumer's willingness to buy. Therefore, at
any price higher than equilibrium price, it will cause the surplus because producers wish to
supply more while consumers tend to buy less. Vice versa, at any lower price than
equilibrium price will cause shortage because demand of goods is higher than supply
willingness of producers.

2.2 DEMAND DETERMINANTS
2.2.1 Prices:
As the aim of this study is to carry out the demand analysis; we would like to
concentrate on demand side and the factors affecting demand only as below part.

7


The demand curve or quantity demanded will depend on the series of factors, here
called as demand determinants such as price of goods, price of substitution or complement
goods, consumer's income, consumer's taste or preference. The changes in such

determinants will create the shifts of or movement along the demand curve. The Figure 2.2
below is devoted to illustrate the effect of changing in price of goods on quantity demanded
which create the new equilibrium point.
Sl

Price

~

S2

Al

PI
A2
P2

Dl

Ql

Q2

Quantity

Figure 2.2 : Shits in supply
(Source: Figure 2.2, Robert S.Pindyck et.al ,1992 : 21)

The initial demand and supply curves are D 1 and S 1 respectively, which cross each
other at the point A 1 as the initial equilibrium point of the market that is correspondent to the

equilibrium price P 1 and the quantity demanded Q1• If price of input material for production
is going down, leading to cheaper price of the goods, the producers will be willing to supply
at the lower price P2 that expect more quantity demanded up to the quantity Q2 where the
new supply curve intersects the demand curve D 1 at the A2 as the new equilibrium point. The
market reaches the equilibrium status again as the result of shift of supply curve to the right
from S1 to S2 • Such the circumstances were based on the basic assumption that other factors
remain constant, in short by the words "other things equal'. These factors would include
consumer's income, price of complement goods, etc.
In case, price of the goods is forced to be higher than initial one, it would be expected
that the lower quantity demanded, as a part of consumer at lower income would not afford
for higher price. Therefore, we could conclude the price of goods is important determinant
affecting demand of goods in term of quantity demanded. Any changes in the price of goods
8


will result in changes in its quantity demanded. Beside above price effect, demand of goods
may also be effected by price of another goods as the following discussions.

Price of complement and substitution goods:
In reality, consumers always face a lot of goods that may provide the same services.

If they can not buy margarine, they may choose butter as replacement So, margarine and
butter are substitutes. The demand of butter would be increased if the price of margarine is
increased (Robert S.Pindyck, et.al ,1992: 32) as consumers will choose to consume butter at
relatively cheaper price than margarine. In case of TV, we could not find any other goods
that provide exactly the same services as TV does. For example, Video Cassette Recorder
(VCR) and videotape or Movie Theater might provide films. However people cannot receive
daily information around the world from VCR or movie theaters as fast as TVs provide. So,
VCR and videotape can be considered as partial substitution of TV only. In general, we
assume that there is no substitute goods for TV and thus substitution effect on demand of TV

is eliminated from this study.
In another case, one goods must be consumed together with another such as

automobile and gasoline, tram and electricity, for example. In such the case, two goods are
considered as complements, (Robert S.Pindyck, et.al ,1992 : 32), for which an increase in
price of one goods will result in lower demand of another one and vice versa. When people
enjoy services of TVs, there are two basic complements as television broadcasting and
electricity. So, the change in price of electricity and television broadcasting services, if any,
will certainly affect demand of TV.
Price ofgoods in world market
In the era of economic integration as today, most of national economy tends to be

more open to the regional or world economics activities. Importation or exportation of goods
and services are integrated part of these activities. Importation of goods will affect domestic
demand by their price or quality. In this figure below, we illustrate the effect of world price
on domestic demand through importation, plus import tax effect.

9


Price

Pt

Pw
D

Osl

Os2

Od2

Odl

Quantity

Figure 2.3: The welfare costs of a tariff
(Source : Begg D. et.al, 1992:593)

The domestic market without importation is assumed to have the supply curve S and
demand D, which cross each other at the point A as equilibrium point. The world price of
that goods is Pw, lower than the domestic price. If importation is allowed under the tariff
imposed at the level equal to (Pt-Pw), the quantity demanded in domestic market will be Qd2
while domestic produces could supply at the quantity of Qs2. The shortage of "Qd2-Qs2) is
fed by importation. In the contrast case, if domestic price is lower than world market price,
exportation is expected to take place and a part of consumer will have to give up
consumption of that good. Above argument allow us to conclude that price of the world
market will also affect demand of good in domestic market as well as other mentioned price
above.
It might be useful for this study to go further in term of consumer benefit, thank to
open trade so that goods at lower price from the world market will flow into the domestic.
However, if government imposes the tax as above, consumers have to pay extra payment.
Where such the extra payment will come? According to Begg D.et.al (1991) the total
extra consumer payment is the area LFHG that can be divided into a number of cost and
revenue as: (1) the government revenue will be increased by the area EFHI as result of the
quantity of goods imported under the tax imposed; (2) Producers will receive extra profits by
the area ECJL; (3) A number of inefficient producers will receive amount of extra consumer
payment by ECI thank to imposing tax . This amount is also considered the cost of society to

10


support these inefficient firms; (4) The area FGH represent the social losses due to reducing
in quantity of consumption from consumers. Now, we may understand how would the too
high tariff rate hurt consumer's benefit. In case of TV in Vietnam, import tax rate of 60% for
complete sets is considerably high to make TV price in domestic higher, leading to less
consumption of Vietnamese consumers. In addition, such the high tariff rate will remain a
number of inefficient TV makers. How should the Government policy for this matter will be
discussed in the Chapter 5.

2.2.2 Income:

The next important determinant of demand that we should analyze is the income of
consumer in general or disposable income of consumer that is defined as the amount of
money that consumer is allowed to spend for him or herself after tax (Begg D. at.al, 1991).
We assume that the initial status of the market is as the below figure on which the initial
demand curve symbolized by D and the price of good is set up at P 1 and the quantity
demanded is at QJ.Price

P2

Pl

Dl

D

Ql

Q2

Quantity

Figure 2.4 : Shifts in Demand
(Source: Figure 2.4, Robert S.Pindyck et.al ,1992 : 23)

According to Robert S. Pindyck et al (1992), when consumer disposable income has
increased, demand for most of goods will be increased. At the price level of P~, consumer
will have higher quantity demanded as illustrated by the shift of demand curve from D to D 1•
Larger quantity demanded is recorded at Q2 as result of increase in consumer's income. Such
effect , in general, is called income effect. However, income effect can be divided into two
sub-effects as the below theory of indifferent curve.
11


Indifferent curves:
We come to further analysis of income effects on demand by the theory of
indifference curve as assumption of Robert S.Pindyck et.al (1992) that a consumer in the
market usually faces with many items that they could buy and they will make comparison
between some combination of goods as the Table 1, so-called "market basket" . They may
be able to choose the best basket that fit their preferences most.
Table 2.1 : Alternative market baskets
Market basket

Unit of Food per week

Unit of clothing per week

A

20

30

B

10

50

D

40

20

E

30

40

G

10

20

H

10

40

The diagram below derived from the Table 2.1 would describe some alternatives of
goods in which consumer might choose a one. The vertical axis show the unit of clothing per
week while the horizontal axis represent unit of food per week.
Clothimr

50

........................................................................:

H

40

30
20

10

- -r~

'

,
E

-r=--1
=~:~-~l= ~=~~~~~:~:~ ~-~] ~
- -J- --~---~- -10

20

30

-

U1

r-

40

Food

Figure 2.5 : An indifference curve
(Source: Robert S.Pindyck et.al ,1991: 61)

12


The consumers face with several market basket such as A,B,D,E,H and G. Each of
market basket combines two goods: Clothing and Food to be consumed per week According
to S.Himmelweit et.al (1998), a number of basic assumptions should be satisfied such as (1)
consumer's preference are complete • It means that consumer is able to evaluate and rank all
market basket based on satisfaction or utility they would gain. They would prefer A to B or
prefer B to A or may be they consider both A and B are equal; (2) the second is that

consumer's preference are transitive. It means, if they prefer A to B, and prefer B to D , they
will prefer A to D; and (3) consumer prefer more to less of any goods, leaving the cost out of
consideration. Under these basic assumptions, consumer will be able to rank any market
basket by deciding whether they prefer this one to that one or they may be indifferent
between two market baskets. They will certainly prefer A to G because two of goods at the
point A is larger than that of the point G. In addition, the pointE is preferred than A and G
because it provides larger in term of number of both goods. However, we could not know
how consumer prefer between A, B, D and H without additional information as the

indifferent curve is lined betweenA,B and D.
How would we draw such indifferent curve? Begg D.et.al (1991) developed the
concept of " marginal rate of substitution" that allow us to come to the understanding of
why such the indifferent curve exist : " The marginal rate of substitution of the first goods for
the second goods is the quantity of the second goods the consumer must sacrifice to increase
the quantity of the first goods by one unit without changing total utility'' (Begg D, et al,
1991: 78). He assumes that consumer's preference is subject to the rule of diminishing
marginal rate of substitution " Consumer's tastes exhibit a diminishing marginal rate of
substitution when, to hold utility constant, diminishing quantity of one goods must be
sacrificed to obtain successive equal increases in the quantity of the other goods" (Begg D, et
al,1991: 79). So, the indifferent curve U1 on the Figure 2.5 is thus drawn. At every point on
the U1, same utility is obtained for consumer who choose a markd basket on that line.
Another important determinant of consumer's demand would be consumer's choices
or preferences that is varied between person to person because of their individualism. Some
one would prefer this one to that one while the contrast case can be observed in another one's
cases. However, almost of consumers will be under their limited resources of income, time,

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etc and thus their consumption behavior would be subject to some specific rules which is

going to be analyzed in the following part.

2.3 THEORY OF CONSUMER'S CHOICES
The theory of indifferent curve set the foundation for us to move up to the important
theory of consumer choices that would answer a number of questions such as " why do
consumer buy , what they buy and how do they react to changes in price of goods and their
income?" (Kooreman P. et.al,1996:11). As the above mentioned, consumers will be able to
rank the market basket according to utility they could gain. Therefore, as rational consumer,
they would tend to look for the market basket that gives them utility as big as possible.
However, all consumers, even the King of a country, have to face with the problem that they
have limited budget to buy and thus they are not be able to buy as much as they wish. The
line MN on the diagram below represent limited budget of consumers that is assumed to
allocate for two goods: clothing and food.

Clothin2:

40

30

20

20

40

80 N

Food

Figure 2.6 : Maximizing consumer satisfaction
(Source: Robert S.Pindyck et.al, 1992:74)

Under the budget line MN, consumer may devote all budget for food and will get 80 units
of food and no clothing and vice versa 40 units of clothing without any unit of food.
However, he needs both and thus he will choose to consume at the point on the budget line

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MN. According to Robert S.Pindyck et.al (1992), the utility maximizing market basket
should satisfy two conditions: (1) it must locate on the budget line; and (2) it would give the
consumers the most preferred combination of goods. The indifferent curve is drawn to solve
the problem of determining the point that satisfies both conditions above.
The indifferent curve U3 represents the biggest utility that consumer cannot obtain due to
out of his budget line. In other words, his budget is limited to reach such level of utility. The
indifferent curve U1 that intersects with the budget line is possible solution because it does
not exceed the budget line. However, this is not the best solution as consumer could gain
more utility by choosing the combination inside the area between U1 and MN. The U2 is the
best solution, as consumer will gain maximum utility at the point A on which the indifferent
curve U2 is tangent to the budget line MN. At the point A, two required conditions are both
satisfied and bring to consumer the possible biggest utility.
The findings above is also confirmed by S.Himmelweit et.al (1998) as neoclassical
theory of consumption that consumer, as rational individual, will always maximize the utility
at given budget. S.Himmelweit et.al (1998:8).

Income and substitution effects
Changes in price of one goods will lead to two impacts on consumer's behavior. Let's
survey the diagram below on which consumers will allocate their limited budget on two
commodities jam and marmalade. These two goods are substitution because consumers can

change to consume jam instead of marmalade if they prefer jam or the price of marmalade is
increased.
Jam
A-7 A' Substitution effect
A'-7 B Income effect

Marmalade
Figure 2.7: Income and substitution effects
(Source: S.Himmelweit et.al, 1998:18)

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The budget ZS allows them to have the maximum utility at the point A. When the price
of marmalade is decreased, the consumer will respond by consuming more marmalade
represented by the budget line ZT instead of ZS as the beginning. They will obtain now
utility position at the point B instead of point A. By drawing the RP line that is parallel with
ZT, we can split the effect into two ones. The first impact represented by movement from the
point A to A' is called substitution effect. When price of marmalade is decreased, consumer
will tend to consume more marmalade instead of jam because these are substitution. The
second impact represented by movement from the point A' to B is called income effect. Due
to decrease in price of marmalade at given budget constraint, the real income of consumer
will be improved and thus consume more marmalade. The way to illustrate income effect
more clearly be shifting the budget line from RP that parallel with ZT to the position of ZT.
This shift represent the situation that consumers can afford for both goods when their real
income is increased.
According to S.Hiinmelweit et.al (1998), total effect of price change is the combination
of two effects : income effect and substitution effect. The significance is that substitution
effect can happen only by the consumers substitute a part of one goods by another. In income
effect, consumers might either increase consumption of both of goods or only one goods.

The above results allow us to come to conclusion that demand for goods depend on a set
of determinants such as price of goods, taste of consumer, consumer's income and price of
substitution goods. One or more than one of these determinants changed would result in
change in demand function of consumers.

Income-consumption curves ·
For better understanding effect of change in income on demand of goods, it might be
useful to employ the concept income-consumption line to be better illustration as below two
diagrams.
The first diagram 2.8(a) shows the unit of clothing per month on the vertical axis and
horizontal axis is devoted the unit of food per month. Initial consumer income is $10 at price
of food is $1 per unit and $2 per unit of clothing. As rational consumer subject to utility
maximization rule, consumer will come to the choice of consumption at the point A, which is
tangent between their budget line and indifferent curve Ul. The corresponding unit of

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