Topic03_consumer

Topic03_consumer - Topic 3 Consumer Behavior COMM 295 295...

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Topic 3 Consumer Behavior OMM 295 COMM 295 Ratna K. Shrestha
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Introduction he theory of consumer behavior can be z The theory of consumer behavior can be used to help answer these and many more questions. 1. How do consumers with limited income decide what bundle of goods to buy? 2. How do consumers allocate income to the purchase of different goods? 3. How are consumer preferences used to determine demand? 2
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Introduction he model of consumer behavior (or heory z The model of consumer behavior (or Theory of Consumer Behavior) is based on the following premises: 1. Individual preferences determine the amount of pleasure they derive from a basket of goods they consume. 2. Consumers face budget constraint. 3. Consumers maximize their satisfaction subject to the constraint they face. 3
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Consumer Preferences – Basic Assumptions 1. Preferences are complete . ± Consumers can rank market askets/bundle baskets/bundle. 2. Preferences are transitive . one prefers bundle A to B and B to C ± If one prefers bundle A to B, and B to C, then he must prefer A to C 3. Consumers always prefer more of any good to less. ± More is better 4
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Consumer Preferences onsumer preferences can be represented z Consumer preferences can be represented graphically using indifference curves difference curves present all combinations z Indifference curves represent all combinations of market baskets that a consumer views as equally desirable. z Points such as B & D have more of one good but less of another compared to A. z Consumer may be indifferent between B, A and D. All of them give the same utility U 1 . 5
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Indifference Curves: An Example arket Basket nits of Food nits of Clothing Market Basket Units of Food Units of Clothing A2 0 3 0 B1 0 5 0 D4 0 2 0 E3 0 4 0 0 0 G 10 20 H1 0 4 0 6
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Indifference Curves: An Example •Indifferent among B, A, & D. preferred to Clothing 50 B E is U 1 U 1 is preferred to H & G 40 E H 20 30 D A 10 0 U 1 G 7 Food 10 20 30 40
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difference Curves: Properties Indifference Curves: Properties z . Indifference curves slope downward 1. Indifference curves slope downward . ± If it sloped upward it would violate the assumption that more is preferred to less. That is, some points that had more of both goods would be indifferent to a basket with less of both goods. z 2. Indifference curves can not cross. ± If they do, it would violate the assumption of more is better. 8
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Indifference Maps is preferred to (due Clothing •B is preferred to D (due to “more is better” rule) •A is indifferent to B & D U 1 U 2 •B must be indifferent to D but that can’t be if B is preferred to D A B ood U 1 U 2 D 9 Food
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difference Maps Indifference Maps z 3. A set of indifference curves–an indifference map- - describes preferences for ll combinations of goods and services all combinations of goods and services.
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Topic03_consumer - Topic 3 Consumer Behavior COMM 295 295...

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