Ch 3-Theory of Consumer Behaviour- webct.docx - Chapter 3 Theory of Consumer Behaviour Rational Choice The basic model of Consumer Behavior focuses on 2

Ch 3-Theory of Consumer Behaviour- webct.docx - Chapter 3...

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Chapter 3 Theory of Consumer Behaviour & Rational Choice The basic model of Consumer Behavior focuses on 2 important factors influencing consumer behavior. First is the consumers’ preferences( willingness ), or tastes over various combination of goods. Second is the ability of consumers to acquire goods as determined by income and prices of the goods. The theory follows directly from the theory of constrained maximization . How do individual consumers form their demands for products? We assume that our consumer is rational and wishes to maximize his/her well being,which is a function of the goods he/she consumes. However, the amount of goods she can consume will be constrained by her income, given the prices of goods and her tastes and preferences for goods. We’ll develop the concepts of utility functions, indifference curves and budget lines and from this we will derive the individual consumer demand curve for a good . The derivation of consumer’s demand curve is based on a Model of Indifference Curves & Budget Lines. Consumer Preferences & Utility Assumptions: Economists base their analysis on some general propositions about consumer behavior that are widely believed to be true. These assumptions are: 1. Complete Information : We assume for now that consumers have complete information pertaining to their consumptions decisions. They know the full range of goods & services available and the capacity of each to provide utility. 2. Preference Ordering Ability of all bundles : Consumers are able to rank all conceivable bundles of commodities. When confronted with 2 or more bundles of goods, consumers can determine their order of preference among them e.g. a Big Mac & a Whopper or 1) Bundle A consists of 5 candy bars and 1 soft drink. 2) Bundle B consists of 3 candy bars and 3 soft drinks. Ranking the 2 bundles the person can make 1 of 3 possible responses: (i)I prefer bundle A to B (ii)I prefer Bundle B to A, or (iii)I would be equally satisfied with either. A consumer who is indifferent between 2 bundles clearly feels that either bundle would yield the same level of satisfaction. A preferred bundle would yield more satisfaction than the other less preferred bundle. Also note that price has nothing to do with preferences. Preferences is a theoretical concept about how people can rank bundles of goods. 1
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3. Consumer is Rational . If there are 3 bundles A, B & C, and if the consumer prefers A to B & B to C, then bundle A must be preferred to bundle C. Utility is the benefit or satisfaction consumers obtain from goods & services they consume . A Utility Function is an equation that shows an individual’s perception of the level of utility that would be attained from consuming each conceivable bundle or combination of goods & services. U=f(X,Y).
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  • Spring '08
  • Salmasi

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