The theories of consumer behavior (KINH tế VI mô SLIDE)

Chapter The Theories of Consumer Behavior MICROECONOMICS Overview Chapter Theories of consumer behavior Explanation of how consumers allocate income to purchase different goods and services (market basket)  Utility Theory  Theory of Consumer Choice Three steps: Consumer Preference Budget Constraint Given preferences and limited incomes, what amount and type of goods will be purchased? Utility Theory • Utility is the satisfaction or pleasure that a consumer gets from consuming a given bundle of goods or service (market basket) E.g Utility for coffee Number of cups Utility 10 13 15 16 Utility  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) – Consumers try to obtain the largest possible total satisfaction (utility) from the market basket that they buy with their incomes Utility Function • Formula that assigns level of utility to individual market baskets – Baskets of X and Y U = f (X; Y) E.g.: Baskets (X-Coffee; Y-Sweets) U = X.Y or U = X1/2.Y1/2 • Consumer’s purpose: maximizing total utility  Umax Marginal Utility (MU) • MU measures additional satisfaction obtained from consuming additional unit of goods or service – 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 U MU  Q Marginal utility -MU Number of cups Utility MU 0 6 10 13 15 16 Observation: Marginal Utility is diminishing as consumption increase Marginal utility Principle of Diminishing marginal utility: 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 Application • Diminishing marginal utility and demand curve • 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 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 Application • 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 – CS = MUx – Px – A lower market price will increase consumer surplus – A higher market price will reduce consumer surplus Consumer Surplus: Mathematically Maximum Price = $11 Market Price = $6 Quantity Purchased = Assume: Price drops $1 for every additional unit sold Consumer Surplus = $15 $51 - $36 = $15 ($11+$10+$9+$8+$7+$6) - ($6 x 6) = $15 $11 $10 $9 $8 $7 Market Price $6 D Quantity Purchased P $11 $10 Total Consumer Benefits $9 $8 $7 $6 D Q P $11 $10 $9 $8 Consumer’s Expense $7 $6 D Q P Consumer Benefit -Consumer Expense CONSUMER SURPLUS! $11 $10 $9 $8 $51 - $36 = $15 $7 $6 D Q Consumer Surplus: Graphical S Pmax Consumer Surplus PE D QE ...Overview Chapter Theories of consumer behavior Explanation of how consumers allocate income to purchase different goods and services (market basket)  Utility Theory  Theory of Consumer. .. 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 U MU  Q Marginal utility -MU Number of cups... the market basket that they buy with their incomes Utility Function • Formula that assigns level of utility to individual market baskets – Baskets of X and Y U = f (X; Y) E.g.: Baskets (X-Coffee;