1、Chapter 3:Consumer BehaviorSlide 1Topics to be DiscussedvConsumer PreferencesvBudget ConstraintsvConsumer ChoicevRevealed PreferencesChapter 3:Consumer BehaviorSlide 2Topics to be DiscussedvMarginal Utility and Consumer ChoicesvCost-of-Living IndexesChapter 3:Consumer BehaviorSlide 3Consumer Behavio
2、rvTwo applications that illustrate the importance of the economic theory of consumer behavior are:Apple-Cinnamon CheeriosThe Food Stamp Program.Chapter 3:Consumer BehaviorSlide 4Consumer BehaviorvGeneral Mills had to determine how high a price to charge for Apple-Cinnamon Cheerios before it went to
3、the market.Chapter 3:Consumer BehaviorSlide 5Consumer BehaviorvWhen the food stamp program was established in the early 1960s,the designers had to determine to what extent the food stamps would provide people with more food and not just simply subsidize the food they would have bought anyway.Chapter
4、 3:Consumer BehaviorSlide 6Consumer BehaviorvThese two problems require an understanding of the economic theory of consumer behavior.Chapter 3:Consumer BehaviorSlide 7Consumer BehaviorvThere are three steps involved in the study of consumer behavior.1)We will study consumer preferences.vTo describe
5、how and why people prefer one good to another.Chapter 3:Consumer BehaviorSlide 8Consumer BehaviorvThere are three steps involved in the study of consumer behavior.2)Then we will turn to budget constraints.vPeople have limited incomes.Chapter 3:Consumer BehaviorSlide 9Consumer BehaviorvThere are thre
6、e steps involved in the study of consumer behavior.3)Finally,we will combine consumer preferences and budget constraints to determine consumer choices.vWhat combination of goods will consumers buy to maximize their satisfaction?Chapter 3:Consumer BehaviorSlide 10Consumer PreferencesvA market basket
7、is a collection of one or more commodities.vOne market basket may be preferred over another market basket containing a different combination of goods.Market BasketsChapter 3:Consumer BehaviorSlide 11Consumer PreferencesvThree Basic Assumptions 1)Preferences are complete.2)Preferences are transitive.
8、3)Consumers always prefer more of any good to less.Market BasketsChapter 3:Consumer BehaviorSlide 12Consumer PreferencesA2030B1050D4020E3040G1020H1040Market BasketUnits of Food Units of ClothingChapter 3:Consumer BehaviorSlide 13Consumer PreferencesvIndifference curves represent all combinations of
9、market baskets that provide the same level of satisfaction to a person.Indifference CurvesChapter 3:Consumer BehaviorSlide 14The consumer prefersA to all combinationsin the blue box,whileall those in the pinkbox are preferred to A.Consumer PreferencesFood(units per week)1020304010203040Clothing(unit
10、s per week)50GAEHBDChapter 3:Consumer BehaviorSlide 15U1Combination B,A,&Dyield the same satisfactionE is preferred to U1U1 is preferred to H&GConsumer PreferencesFood(units per week)1020304010203040Clothing(units per week)50GDAEHBChapter 3:Consumer BehaviorSlide 16Consumer PreferencesvIndifference
11、CurvesIndifference curves slope downward to the right.vIf it sloped upward it would violate the assumption that more of any commodity is preferred to less.Chapter 3:Consumer BehaviorSlide 17Consumer PreferencesvIndifference CurvesAny market basket lying above and to the right of an indifference curv
12、e is preferred to any market basket that lies on the indifference curve.Chapter 3:Consumer BehaviorSlide 18Consumer PreferencesvAn indifference map is a set of indifference curves that describes a persons preferences for all combinations of two commodities.Each indifference curve in the map shows th
13、e market baskets among which the person is indifferent.Indifference MapsChapter 3:Consumer BehaviorSlide 19Consumer PreferencesvIndifference CurvesFinally,indifference curves cannot cross.vThis would violate the assumption that more is preferred to less.Chapter 3:Consumer BehaviorSlide 20U2U3Consume
14、r PreferencesFood(units per week)Clothing(units per week)U1ABDMarket basket Ais preferred to B.Market basket B ispreferred to D.Chapter 3:Consumer BehaviorSlide 21U1U2Consumer PreferencesFood(units per week)Clothing(units per week)ADBThe consumer shouldbe indifferent betweenA,B and D.However,B conta
15、ins more ofboth goods than D.Indifference CurvesCannot CrossChapter 3:Consumer BehaviorSlide 22ABDEG-1-611-4-211Observation:The amountof clothing given up for a unit of food decreasesfrom 6 to 1Consumer PreferencesFood(units per week)Clothing(units per week)23451246810121416Question:Does thisrelatio
16、n hold for givingup food to get clothing?Chapter 3:Consumer BehaviorSlide 23Consumer PreferencesvThe marginal rate of substitution(MRS)quantifies the amount of one good a consumer will give up to obtain more of another good.It is measured by the slope of the indifference curve.Marginal Rate of Subst
17、itutionChapter 3:Consumer BehaviorSlide 24Consumer PreferencesFood(units per week)Clothing(units per week)23451246810121416ABDEG-61111-4-2-1MRS=6MRS=2FCMRSChapter 3:Consumer BehaviorSlide 25Consumer PreferencesvWe will now add a fourth assumption regarding consumer preference:Along an indifference c
18、urve there is a diminishing marginal rate of substitution.vNote the MRS for AB was 6,while that for DE was 2.Marginal Rate of SubstitutionChapter 3:Consumer BehaviorSlide 26Consumer PreferencesvQuestionWhat are the first three assumptions?Marginal Rate of SubstitutionChapter 3:Consumer BehaviorSlide
19、 27Consumer PreferencesvIndifference curves are convex because 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.vConsumers prefer a balanced market basketMarginal Rate of SubstitutionChapter 3:Consumer BehaviorSl
20、ide 28Consumer PreferencesvPerfect Substitutes and Perfect ComplementsTwo goods are perfect substitutes when the marginal rate of substitution of one good for the other is constant.Marginal Rate of SubstitutionChapter 3:Consumer BehaviorSlide 29Consumer PreferencesvPerfect Substitutes and Perfect Co
21、mplementsTwo goods are perfect complements when the indifference curves for the goods are shaped as right angles.Marginal Rate of SubstitutionChapter 3:Consumer BehaviorSlide 30Consumer PreferencesOrange Juice(glasses)Apple Juice(glasses)234112340PerfectSubstitutesChapter 3:Consumer BehaviorSlide 31
22、Consumer PreferencesRight ShoesLeftShoes234112340PerfectComplementsChapter 3:Consumer BehaviorSlide 32Consumer PreferencesvBADSThings for which less is preferred to morevExamplesAir pollutionAsbestosChapter 3:Consumer BehaviorSlide 33Consumer PreferencesvWhat Do You Think?How can we account for Bads
23、 in the analysis of consumer preferences?Chapter 3:Consumer BehaviorSlide 34Consumer PreferencesvAutomobile executives must regularly decide when to introduce new models and how much money to invest in restyling.Designing New Automobiles(I)Chapter 3:Consumer BehaviorSlide 35Consumer PreferencesvAn a
24、nalysis of consumer preferences would help to determine when and if car companies should change the styling of their cars.Designing New Automobiles(I)Chapter 3:Consumer BehaviorSlide 36Consumer PreferencesThese consumers arewilling to give up considerablestyling for additionalperformanceStylingPerfo
25、rmanceConsumerPreference A:High MRSChapter 3:Consumer BehaviorSlide 37Consumer PreferencesThese consumers arewilling to give upconsiderableperformance for additional stylingStylingPerformanceConsumerPreference B:Low MRSChapter 3:Consumer BehaviorSlide 38Consumer PreferencesvWhat Do You Think?How can
26、 we determine the consumers preference?Designing New Automobiles(I)Chapter 3:Consumer BehaviorSlide 39Consumer PreferencesvA recent study of automobile demand in the United States shows that over the past two decades most consumers have preferred styling over performance.Designing New Automobiles(I)
27、Chapter 3:Consumer BehaviorSlide 40Consumer PreferencesvGrowth of Japanese Imports1970s and 1980sv15%of domestic cars underwent a style change each yearvThis compares to 23%for importsDesigning New Automobiles(I)Chapter 3:Consumer BehaviorSlide 41Consumer PreferencesvUtilityUtility:Numerical score r
28、epresenting the satisfaction that a consumer gets from a given market basket.Chapter 3:Consumer BehaviorSlide 42Consumer PreferencesvUtilityIf buying 3 copies of Microeconomics makes you happier than buying one shirt,then we say that the books give you more utility than the shirt.Chapter 3:Consumer
29、BehaviorSlide 43Consumer PreferencesvUtility FunctionsAssume:The utility function for food(F)and clothing(C)U(F,C)=F+2C Market Baskets:F units C units U(F,C)=F+2C A 8 3 8+2(3)=14 B 6 4 6+2(4)=14 C 4 4 4+2(4)=12 The consumer is indifferent to A&B The consumer prefers A&B to CChapter 3:Consumer Behavi
30、orSlide 44Consumer PreferencesFood(units per week)10155510150Clothing(unitsper week)U1=25U2=50(Preferred to U1)U3=100(Preferred to U2)ABCAssume:U=FCMarket Basket U =FCC 25=2.5(10)A 25=5(5)B 25=10(2.5)Utility Functions&Indifference CurvesChapter 3:Consumer BehaviorSlide 45Consumer PreferencesvOrdinal
31、 Versus Cardinal UtilityOrdinal Utility Function:places market baskets in the order of most preferred to least preferred,but it does not indicate how much one market basket is preferred to another.Cardinal Utility Function:utility function describing the extent to which one market basket is preferre
32、d to another.Chapter 3:Consumer BehaviorSlide 46Consumer PreferencesvOrdinal Versus Cardinal RankingsThe actual unit of measurement for utility is not important.Therefore,an ordinal ranking is sufficient to explain how most individual decisions are made.Chapter 3:Consumer BehaviorSlide 47Budget Cons
33、traintsvPreferences do not explain all of consumer behavior.vBudget constraints also limit an individuals ability to consume in light of the prices they must pay for various goods and services.Chapter 3:Consumer BehaviorSlide 48Budget ConstraintsvThe Budget LineThe budget line indicates all combinat
34、ions of two commodities for which total money spent equals total income.Chapter 3:Consumer BehaviorSlide 49Budget ConstraintsvThe Budget LineLet F equal the amount of food purchased,and C is the amount of clothing.Price of food=Pf and price of clothing=PcThen Pf F is the amount of money spent on foo
35、d,and Pc C is the amount of money spent on clothing.Chapter 3:Consumer BehaviorSlide 50Budget ConstraintsvThe budget line then can be written:ICPFPCFChapter 3:Consumer BehaviorSlide 51Budget ConstraintsA040$80B2030$80D4020$80E6010$80G800$80Market Basket Food(F)Clothing(C)Total SpendingPf =($1)Pc=($2
36、)PfF+PcC=IChapter 3:Consumer BehaviorSlide 52Budget Line F+2C=$80CF/PPFC-21-/Slope1020(I/PC)=40Budget ConstraintsFood(units per week)406080=(I/PF)201020300ABDEGClothing(unitsper week)Pc=$2 Pf=$1 I=$80Chapter 3:Consumer BehaviorSlide 53Budget ConstraintsvThe Budget LineAs consumption moves along a bu
37、dget line from the intercept,the consumer spends less on one item and more on the other.The slope of the line measures the relative cost of food and clothing.The slope is the negative of the ratio of the prices of the two goods.Chapter 3:Consumer BehaviorSlide 54Budget ConstraintsvThe Budget LineThe
38、 slope indicates the rate at which the two goods can be substituted without changing the amount of money spent.Chapter 3:Consumer BehaviorSlide 55Budget ConstraintsvThe Budget LineThe vertical intercept(I/PC),illustrates the maximum amount of C that can be purchased with income I.The horizontal inte
39、rcept(I/PF),illustrates the maximum amount of F that can be purchased with income I.Chapter 3:Consumer BehaviorSlide 56Budget ConstraintsvThe Effects of Changes in Income and PricesIncome ChangesvAn increase in income causes the budget line to shift outward,parallel to the original line(holding pric
40、es constant).Chapter 3:Consumer BehaviorSlide 57Budget ConstraintsvThe Effects of Changes in Income and PricesIncome ChangesvA decrease in income causes the budget line to shift inward,parallel to the original line(holding prices constant).Chapter 3:Consumer BehaviorSlide 58Budget ConstraintsFood(un
41、its per week)Clothing(unitsper week)8012016040204060800A increase inincome shiftsthe budget lineoutward(I=$160)L2(I=$80)L1L3(I=$40)A decrease inincome shiftsthe budget lineinwardChapter 3:Consumer BehaviorSlide 59Budget ConstraintsvThe Effects of Changes in Income and PricesPrice ChangesvIf the pric
42、e of one good increases,the budget line shifts inward,pivoting from the other goods intercept.Chapter 3:Consumer BehaviorSlide 60Budget ConstraintsvThe Effects of Changes in Income and PricesPrice ChangesvIf the price of one good decreases,the budget line shifts outward,pivoting from the other goods
43、 intercept.Chapter 3:Consumer BehaviorSlide 61Budget ConstraintsFood(units per week)Clothing(unitsper week)801201604040(PF=1)L1An increase in theprice of food to$2.00 changesthe slope of thebudget line androtates it inward.L3(PF=2)(PF=1/2)L2A decrease in theprice of food to$.50 changesthe slope of t
44、hebudget line androtates it outward.Chapter 3:Consumer BehaviorSlide 62Budget ConstraintsvThe Effects of Changes in Income and PricesPrice ChangesvIf the two goods increase in price,but the ratio of the two prices is unchanged,the slope will not change.Chapter 3:Consumer BehaviorSlide 63Budget Const
45、raintsvThe Effects of Changes in Income and PricesPrice ChangesvHowever,the budget line will shift inward to a point parallel to the original budget line.Chapter 3:Consumer BehaviorSlide 64Budget ConstraintsvThe Effects of Changes in Income and PricesPrice ChangesvIf the two goods decrease in price,
46、but the ratio of the two prices is unchanged,the slope will not change.Chapter 3:Consumer BehaviorSlide 65Budget ConstraintsvThe Effects of Changes in Income and PricesPrice ChangesvHowever,the budget line will shift outward to a point parallel to the original budget line.Chapter 3:Consumer Behavior
47、Slide 66Consumer ChoicevConsumers choose a combination of goods that will maximize the satisfaction they can achieve,given the limited budget available to them.Chapter 3:Consumer BehaviorSlide 67Consumer ChoicevThe maximizing market basket must satisfy two conditions:1)It must be located on the budg
48、et line.2)Must give the consumer the most preferred combination of goods and services.Chapter 3:Consumer BehaviorSlide 68Recall,the slope of an indifference curve is:Consumer ChoiceFCMRSCFPPSlopeFurther,the slope of the budget line is:Chapter 3:Consumer BehaviorSlide 69Consumer ChoicevTherefore,it c
49、an be said that satisfaction is maximized where:CFPPMRS Chapter 3:Consumer BehaviorSlide 70Consumer ChoicevIt can be said that satisfaction is maximized when marginal rate of substitution(of F and C)is equal to the ratio of the prices(of F and C).Chapter 3:Consumer BehaviorSlide 71Consumer ChoiceFoo
50、d(units per week)Clothing(units per week)4080202030400U1BBudget LinePc=$2 Pf=$1 I=$80Point B does not maximize satisfaction because theMRS(-(-10/10)=1 is greater than the price ratio(1/2).-10C+10FChapter 3:Consumer BehaviorSlide 72Consumer ChoiceBudget LineU3DMarket basket D cannot be attainedgiven
