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 ©KieuMinh, FTU ©KieuMinh, FTU ©KieuMinh, FTU Utility- U Utility (U) is the satisfaction or pleasure that a consumer gets from consuming a given bundle of goods or service (market basket)   Utility A market basket is a collection of one or more commodities Characteristics of U    Chapter  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)  ©KieuMinh, FTU Consumers try to obtain the largest possible total satisfaction (utility) from the market basket that they buy with their incomes ©KieuMinh, FTU 11/18/2015 E.g Utility for cookies Marginal Utility (MU) U can be shown in table or function     16 21 24 22 Marginal utility -MU Utility - 16 21 24 22 -2  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  ©KieuMinh, FTU Number of cookies MU measures additional satisfaction obtained from consuming 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 ©KieuMinh, FTU 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 ©KieuMinh, FTU ©KieuMinh, FTU 11/18/2015 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 ©KieuMinh, FTU 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    11 CS = MUx – Px A lower market price will increase consumer surplus A higher market price will reduce consumer surplus ©KieuMinh, FTU D (MU) X1 X2 Xn X3 10 X ©KieuMinh, FTU E.g P= $3/pc CS1 = – =  CS2 = 7- =  CS3 = - =  CS4 = - 3=  CS= CS1 + CS2 + CS3 = 12   12 Number of cookies Utility MU - 16 21 24 22 -2 ©KieuMinh, FTU 11/18/2015 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  CS CS E* D (MU) O 13 Q* Q Q ©KieuMinh, FTU 14 ©KieuMinh, FTU 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:    Theory of Consumer’s Choice U = X.Y U = X1/2.Y1/2 Consumer’s choice: Maximizing Total Utility  Umax Three steps: Consumer Preference Budget Constraint Given preferences and limited incomes, what amount of goods will be purchased? 15 ©KieuMinh, FTU 16 ©KieuMinh, FTU 11/18/2015 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 17 ©KieuMinh, FTU 18 Example ©KieuMinh, FTU 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 ©KieuMinh, FTU Food 20 ©KieuMinh, FTU 11/18/2015 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 ©KieuMinh, FTU Indifference Curves: Characteristics    40 Food ©KieuMinh, FTU Y 50 MRS = 30 We measure how a person trades one good for another using the marginal rate of substitution (MRS) 23 MRS   Y U* 10 Along an indifference curve there is a diminishing marginal rate of substitution ©KieuMinh, FTU MRS = 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 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 ©KieuMinh, FTU 11/18/2015 MRS Quiz Giả sử hàm ích lợi U = f(X,Y)  dU dU dU   X  Y  dX dY  MU x X  MU Y Y   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 ©KieuMinh, FTU Marginal Rate of Substitution  a 26 ©KieuMinh, FTU 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 Juice (glasses) Perfect Substitutes They would always trade glass of OJ for glass of Apple Juice 27 ©KieuMinh, FTU 28 Orange Juice (glasses) ©KieuMinh, FTU 11/18/2015 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 left shoe and right shoe, you are indifferent between having more left shoes only  Left Shoes Perfect Complements Must have one right for one left 29 ©KieuMinh, FTU Budget Constraints      Right Shoes ©KieuMinh, FTU Budget Constraints Market Basket Indicates all combinations of two commodities for which total money spent equals total income We assume only goods are consumed, so we 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 30 The Budget Line  ©KieuMinh, FTU 32 Clothing PC = $2 40 I = PFF + PCC A Food PF = $1 Income $80 B 20 30 $80 D 40 20 $80 E 60 10 $80 G 80 $80 ©KieuMinh, FTU 11/18/2015 The Budget Line The Budget Line - Changes  Clothing (I/PC) = 40 PFF  PCC  I A B 30 Slope  10 20 D C PF  - F 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 20 40 60 33 80 = (I/PF) Food ©KieuMinh, FTU 34 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 80 ©KieuMinh, FTU 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) 35 40 BL1 (I = $80) 80 120 L3 BL2 (I = $160) 160 ©KieuMinh, FTU 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) ©KieuMinh, FTU 11/18/2015 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 37 ©KieuMinh, FTU Quiz      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 39 ©KieuMinh, FTU 40 80 X One consumer uses his income of $60 for consuming commodities X and Y Prices of X is $3 and price of Y is $1,   20 Quiz 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   38 ©KieuMinh, FTU   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 40 ©KieuMinh, FTU 10 ... Xn X3 10 X ©KieuMinh, FTU E.g P= $3/ pc CS1 = – =  CS2 = 7- =  CS3 = - =  CS4 = - 3=  CS= CS1 + CS2 + CS3 = 12   12 Number of cookies Utility MU - 16 21 24 22 -2 ©KieuMinh, FTU 11/18 /2015. .. clothing = PC Then 31 30 The Budget Line  ©KieuMinh, FTU 32 Clothing PC = $2 40 I = PFF + PCC A Food PF = $1 Income $80 B 20 30 $80 D 40 20 $80 E 60 10 $80 G 80 $80 ©KieuMinh, FTU 11/18 /2015 The Budget... goods with less income 20 E 10 G 20 40 60 33 80 = (I/PF) Food ©KieuMinh, FTU 34 The Budget Line - Changes in Income Clothing (units per week) The Budget Line - Changes in Price Clothing (units per