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Chapter 04 _Consumer Behavior_

Chapter 04 _Consumer Behavior_ - Chapter 4 Consumer...

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1 Chapter 4 Consumer Behavior and the Market Demand Function Introduction and Review The question that we will try to answer in this book is whether the quantities of the goods and services produced in a society are allocatively efficient. To answer this question we will analyze the behaviors of consumers and producers. This chapter is concerned with the behavior of a typical consumer. The next few chapters will study a typical producer. The consumer, like everyone else in the society, faces scarcity. The consumer has unlimited material wants, so no matter how much of each good she consumes, she is willing to consume more. However, she has limited resources. Her income consists of the wage she earns from her labor services plus the returns on the assets she owns such as rental homes, stocks, and bonds. Since she has a certain amount of skills and there are only so many hours in a day, and since she has limited amounts of assets, her total income over a short span of time is more or less fixed. Scarcity also means that the goods and services that she consumes do not come free; they command a price. Consumer’s Choice Problem The consumer’s objective is to maximize satisfaction by allocating her fixed income among different goods and services over a period of time. In this chapter we consider a consumer who is deciding on the amount of a particular good to consume. You know the rational decision rule: If MB > MC increase the level of activity If MB < MC decrease the level of activity If MC = MB maintain the level of activity, you are at the optimal point Suppose Bradford is deciding on the number of hamburgers to consume per week. The most he is willing and able to pay for the first hamburger is $8. This is the marginal benefit of the first hamburger. You recall that this means he is indifferent between having the first hamburger in his hand and having that $8 in his pocket. Once he has the first hamburger, the decision becomes whether he wants to buy the second hamburger. He is only willing and able to pay $7 for the second. This is the marginal benefit of the second hamburger to him. Similarly, he is willing and able to pay $6 for the third and $5 for the fourth. Look at Figure 1. The downward sloping line is the consumer’s marginal benefit curve, also called the marginal willingness to pay curve. It shows the amount of money the consumer is willing to pay for the next, or marginal, unit of the good. This concept should not be confused with total willingness to pay . The consumer is willing to pay $7 for the second unit but $15 for the two units altogether. Similarly, he is willing to pay $5 for the 4 th hamburger but $26 for 4 hamburgers ($8 + $7 + $6 + $5).
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2 Total willingness to pay is the area between the MB curve and the horizontal axis up to the point of consumption. This is the area of the trapezoid ABCDE in Figure 1.
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