KINH TẾ VI MÔ Consumer behaviour

CHAPTER 4: THE RATONAL CONSUMER Nguyen Thi Minh Thu, FIE, FTU 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 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 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 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 D million Quantity of iPads 10 CONSUMER CHOICE INDIFFERENCE CURVE BUDGET CONSTRAINT OPTIMAL CHOICE INCOME EFFECT AND SUBSTITUTION EFFECT Nguyen Thi Minh Thu, FIE, FTU 11 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 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 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 Nguyen Thi Minh Thu, FIE, FTU X1 X2 IC X 23 INDIFFERENCE CURVE ΔTUX = MUX * ΔX Y ΔTUY = MUY * ΔY ΔTU = ΔTUX + ΔTUY = MUX * ΔX+ MUY * ΔY=0(1) Y1 A ΔY B Y2 ΔX 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 Nguyen Thi Minh Thu, FIE, FTU Y X 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 BUDGET LINE Payment for good X is PX * X Payment for good Y is PY * Y ⇒PX * X + PY * Y = I ⇒Y = - (PX/ PY) * X + I/ PY (2) Equation (2) is the equation of budget line Its slope is - (PX/ PY) BL is negatively sloped Nguyen Thi Minh Thu, FIE, FTU 28 BUDGET LINE 29 If income changes while prices of both goods remain unchanged, budget line will shift parallel If price of one good changes while Y I/PY holding income and price of the other good, budget line will pivot Nguyen Thi Minh Thu, FIE, FTU I/PX X Optimal Consumption Choice The optimal bundle is bundle that the consumption consumption maximizes a consumer’s total utility given his or her budget constraint 31 OPTIMAL CHOICE Among the five bundles, the consumer C is possible but inefficient A, B, M are both possible Y I/PY A and efficient, of which M brings the highest level of satisfaction Thus M is the optimal bundle G M U3 C U2 B BL Nguyen Thi Minh Thu, FIE, FTU I/PX U1 X 32 OPTIMAL BUNDLE At point M IC’s slope= BL’s slope ⇒-MUX/ MUY = - PX/PY Y I/PY A ⇒MUX/ PX = MUY/PY ⇒The marginal utility of a dollar spent on M each good is the same U2 B BL Nguyen Thi Minh Thu, FIE, FTU I/PX X 33 Extreme cases Y Y X X 34 PRACTICE A consumer has an utility function U = X.Y Price of good X and Y respectively is 10 and 15 dollars per unit His budget for these goods is 600$  How many units of good X and Y the consumer will buy? Nguyen Thi Minh Thu, FIE, FTU ...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... $270 250 D 100 Those individual net gains are known as individual consumer surpluses Đ D Quantity Consumer Surplus Individual Consumer surplus is the net gain to a buyer from the purchase of... 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