301lec3-4

301lec3-4 - 1/12/2010 Reading assignment: Lecture Notes 3-4...

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1/12/2010 1 Lecture Notes 3-4 Consumer Behavior Econ 301 Professor S. Severinov Reading assignment: Chapters 2-3 Consumer Behavior The Theory of consumer behavior is An explanation how consumers allocate income to the purchase of different goods and to the purchase of different goods and services The Theory of consumer behavior explains consumer preferences and choices • How do consumers allocate income to the purchase of different goods? • How do consumers with limited income decide what to buy? • What are the main properties of consumer preferences and choices? More Practical Questions: 1. How would General Mills determine the price to charge for a new cereal before it went to the market? 2 Should indigent individuals be provided 2. Should indigent individuals be provided with food stamps or welfare checks? Will food stamps insure that individuals buy more food or merely subsidize food they would buy anyway? Consumer Behavior There are three steps involved in the study of consumer behavior 1. Consumer Preferences di b h d h l f describe how and why people prefer one good to another 2. Budget Constraints – People have limited incomes
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1/12/2010 2 Consumer Behavior 3. Given preferences and limited incomes, what amount and type of goods will be purchased? What combination of goods will consumers What combination of goods will consumers buy to maximize their satisfaction? Consumer Preferences • How might a consumer compare different groups of items available for purchase? •A market basket is a collection of one or more commodities • Individuals can choose between market baskets containing different goods Consumer Preferences – Basic Assumptions 1. Preferences are complete – Consumers can rank all baskets of goods 2. Preferences are transitive If they prefer A to B and B to C they must If they prefer A to B, and B to C, they must prefer A to C 3. Monotonicity or Non-satiation Consumers always prefer more of any good to less – More is better (?) Consumer Preferences • Consumer preferences can be represented graphically using indifference curves Indifference curves represent all • Indifference curves represent all combinations of market baskets that the person is indifferent to – A person will be equally satisfied with either choice Indifference Curves: An Example Market Basket Units of Food Units of Clothing A2 03 0 B1 05 0 D4 02 0 E3 04 0 G1 0 H1 0 Indifference Curves: An Example • Graph the points with one good on the x- axis and one good on the y-axis • Plotting the points, we can make some immediate observations about preferences – More is better
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1/12/2010 3 The consumer prefers A to all combinations in the yellow box, while all those in the pink Indifference Curves: An Example 40 Clothin g 50 E H B box are preferred to A.
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301lec3-4 - 1/12/2010 Reading assignment: Lecture Notes 3-4...

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