BPUB250 Spring 2008 - Chapter 3 - Consumer Behavior

BPUB250 Spring 2008 - Chapter 3 - Consumer Behavior -...

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Chapter 3 – Consumer Behavior Theory of Consumer Behavior – the explanation of how consumers allocate incomes to the purchase of different goods and services. Section 3.1 – Consumer Preferences Market Basket – a list with specific quantities of one or more goods. Usually refers to the quantity of food, clothing, housing, etc. that a consumer might buy in a certain time period. Consumer theory explains how a consumer might prefer a certain market basket to another and why. Basic assumptions about preferences : o Preferences are complete: For any 2 market baskets A and B, a consumer will prefer one over the other or be indifferent. These preferences do ignore costs. o Preferences are transitive: If a consumer prefers basket A to basket B and basket B to basket C, he also prefers basket A to basket C. This is necessary for consumer consistency. o Preferences are nonsatiable: More of a good is always better than less of a good. Indifference Curves – A curve representing all combinations of market baskets that provide a consumer with the same level of satisfaction. The consumer is indifferent among the market baskets represented along the curve. Any market basket lying above and to the right of an indifference curve is preferred to any market basket on the indifference curve (the opposite for market baskets below and to the left of the indifference curve). This is because a market basket above and to the right represents more of all goods being considered (Assumption #3). Indifference Maps – Graph containing a set of indifference curves showing the market baskets among which a consumer is indifferent. Indifference curves cannot intersect because they would otherwise violate the assumption of insatiability. Indifference curves are downward sloping because they would otherwise violate the assumption of insatiability.
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Marginal rate of substitution – The maximum amount of a good a consumer is willing to give up in order to obtain one additional unit of another good. The MRS measures the
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