Week 3 - Consumer Behaviour Part II

Week 3 - Consumer Behaviour Part II - MICROECONOMICS 200...

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Click to edit Master subtitle style 11 CONSUMER BEHAVIOUR PART II Read Chapter 3.3, 3.5, 4.1 & 4.2 MICROECONOMICS 200
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22 Recap Key Concepts from Week 2: Indifference Curves & Budget Lines n Consumer preferences are modelled using indifference curves and indifference maps n Consumers’ budgets are modelled using budget lines
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U 1 U 2 Indifference Map: Goods Food  Clothing  (units) U 0 E A G Indifference maps:   Comprise a set of  indifference curves E is preferred to A. A is preferred to G. Direction of  ___________  satisfaction increasi ng
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Recap Key Concepts from Week 2: Food  (units) 2 3 4 5 1 Clothing  (units) 2 4 6 8 10 12 14 16 A B D E G -2 -1 1 -6 1 1 1 -4 MRS F for C = - C/ F = 6 MRS F for C = - C/ F = 2 SLOPE OF INDIFFERENCE CURVE So MRS is represented by the slope of the indifference curve
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L 1 An  increase  in the price of food rotates the  budget line  inward . L 3 L 2 decrease  in the price of food rotates the  budget line  outward . Food (units ) Clothing (units) Effects of Price Changes
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66 Effects of Income Changes An  increase  in income is shown by a  parallel outward  shift in the budget line Food (units ) Clothin g (units) 80 120 160 40 20 40 60 80 0 L 2 L 1 L 3 decrease  in income is shown by a  parallel inward  shift in the budget line
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Recap Key Concepts from Week 2: Slope of Budget Line l Assume income of $80/week, price per unit of food is  $1 and price per unit of clothing is $2 o I =  $80 o PF =  $1 o PC =  $2 l Budget line is PFF + PCC = I l Using the  formula  1F + 2C = 80 Slope = ( C/ ˙ F or  - PF/PC  = -1/2 So Relative Price is represented by the slope of the budget line Ratio of Price of F to Price of C; OR Relative Price of F to C
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88 Recap Key Concepts from Week 2: Indifference Curves & Budget Lines n Consumer preferences are modelled using indifference curves n MRS (F for C) = Slope of indifference= -o C/˙ F n Consumers’ budgets are modelled using budget lines n Relative Price of F to C= Slope of budget line = -PF/PC
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99 Recap Key Concepts from Week 2: Consumer Choice Theory n Different consumers prefer different goods & n Consumers have limited incomes to spend & n Consumers’ choices about consumption reflect both their preferences and their budget constraints¯ Consumer preferences Budget constraint Consumer choice
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1010 n Understand the traditional theory’s explanation of how consumers make choices n Trace the effects of price changes from consumer choice to the demand curve n Trace the effects of income changes from consumer choice to the demand curve n Gain an understanding of different types of goods demanded by consumers n Examine the effects of price changes in terms of substitution and income effects This Week’s Learning Outcomes
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n Traditional theory assumes that consumers are rational, self-interested maximisers.
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Week 3 - Consumer Behaviour Part II - MICROECONOMICS 200...

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