Ch 3 - 3 CONSUMER BEHAVIOR Econ 100A Mortimer Consumer...

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CONSUMER BEHAVIOR 3 Econ 100A Mortimer
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Consumer Behavior theory of consumer behavior Description of how consumers allocate incomes among different goods and services to maximize their well-being. Consumer behavior is best understood in three distinct steps: 1. Consumer preferences 2. Budget constraints 3. Consumer choices Econ 100A Mortimer
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CONSUMER PREFERENCES Market Baskets market basket (or bundle ) List with specific quantities of one or more goods. TABLE 3.1 Alternative Market Baskets A 20 30 B 10 50 D 40 20 E 30 40 G 10 20 H 10 40 Market Basket Units of Food Units of Clothing To explain the theory of consumer behavior, we will ask whether consumers prefer one market basket to another. Econ 100A Mortimer
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CONSUMER PREFERENCES Some Basic Assumptions about Preferences 1. Completeness: Preferences are assumed to be complete . In other words, consumers can compare and rank all possible baskets. Thus, for any two market baskets A and B , a consumer will prefer to B , will prefer B to A , or will be indifferent between the two. By indifferent we mean that a person will be equally satisfied with either basket. Note that these preferences ignore costs . A consumer might prefer steak to hamburger but buy hamburger because it is cheaper. Econ 100A Mortimer B A or A B B A
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CONSUMER PREFERENCES Some Basic Assumptions about Preferences 2. Transitivity: Preferences are transitive . Transitivity means that if a consumer prefers basket A to basket B and basket B to basket C , then the consumer also prefers to C . Transitivity is normally regarded as necessary for consumer consistency. 3. More is better than less: Goods are assumed to be desirable—i.e., to be good . Consequently, consumers always prefer more of any good to less. In addition, consumers are never satisfied or satiated; more is always better, even if just a little better . This assumption is made for pedagogic reasons; namely, it simplifies the graphical analysis. Of course, some goods, such as air pollution, may be undesirable, and consumers will always prefer less. We ignore these ―bads‖ in the context of our immediate discussion. Econ 100A Mortimer C A then C B and B A If ,
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The indifference curve U 1 that passes through market basket A shows all baskets that give the consumer the same level of satisfaction as does market basket A ; these include baskets B and D . CONSUMER PREFERENCES Indifference Curves Curve representing all combinations of market baskets that provide a consumer with the same level of satisfaction. This consumer prefers basket E , which lies above U 1 , to A , since E has more of each good than A . Econ 100A Mortimer Preference directions
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CONSUMER PREFERENCES Indifference Maps Graph containing a set of indifference curves showing the market baskets among which a consumer is indifferent. An indifference map describes a person's preferences.
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Ch 3 - 3 CONSUMER BEHAVIOR Econ 100A Mortimer Consumer...

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