chapter_3 - Consumer Behavior There are 3 steps involved in...

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Chapter 3: Consumer Behavior Slide 1 Consumer Behavior There are 3 steps involved in studying consumer behavior. 1) Consumer preferences : describe how and why people prefer one good to another. 2) Budget constraints : people have limited incomes. 3) We will combine consumer preferences and budget constraints to determine consumer choices . What combination of goods will consumers buy to maximize their satisfaction?
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Chapter 3: Consumer Behavior Slide 2 Consumer Preferences A market basket is a collection of one or more commodities. One market basket may be preferred over another market basket containing a different combination of goods. Three Basic Assumptions 1) Preferences are complete . 2) Preferences are transitive. 3) Consumers always prefer more of a good to less. Market Baskets
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Chapter 3: Consumer Behavior Slide 3 Consumer Preferences 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
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Chapter 3: Consumer Behavior Slide 4 U 1 Combination B,A, & D yield the same satisfaction E is preferred to U 1 U 1 is preferred to H & G Consumer Preferences Food (units per week) 10 20 30 40 10 20 30 40 Clothing (units per week) 50 G D A E H B
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Chapter 3: Consumer Behavior Slide 5 Consumer Preferences Indifference curves represent all combinations of market baskets that provide the same level of satisfaction to a person. Indifference Curves slope downward to the right. If they sloped upward it would violate the assumption that more of any commodity is preferred to less.
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Chapter 3: Consumer Behavior Slide 6 Consumer Preferences Indifference Curves Any market basket lying above and to the right of an indifference curve is preferred to any market basket that lies on the indifference curve. Indifference Curves Indifference curves cannot cross as this would violate the assumption that more is preferred to less
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Chapter 3: Consumer Behavior Slide 7 Consumer Preferences An indifference map is a set of indifference curves that describes a person’s preferences for all combinations of two commodities. Each indifference curve in the map shows the market baskets among which the person is indifferent. Indifference Maps
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Chapter 3: Consumer Behavior Slide 8 U 2 U 3 Consumer Preferences Food (units per week) Clothing (units per week) U 1 A B D Market basket A is preferred to B. Market basket B is preferred to D.
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Chapter 3: Consumer Behavior Slide 9 A B D E G -1 -6 1 1 -4 -2 1 1 Observation: The amount of clothing given up for a unit of food decreases from 6 to 1 Consumer Preferences Food (units per week) Clothing (units per week) 2 3 4 5 1 2 4 6 8 10 12 14 16 Question : Does this relation hold for giving up food to get clothing?
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Chapter 3: Consumer Behavior Slide 10 Consumer Preferences The marginal rate of substitution ( MRS ) quantifies the amount of one good a consumer will give up to obtain more of another good.
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