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Unformatted text preview: Chapter 3: Consumer Behavior PART II PRODUCERS, CONSUMERS, AND COMPETITIVE MARKETS CHAPTER 3 CONSUMER BEHAVIOR TEACHING NOTES Chapter 3 builds the foundation for deriving the demand curve in Chapter 4. In order to understand demand theory, students must have a firm grasp of indifference curves, the marginal rate of substitution, the budget line, and optimal consumer choice. It is possible to discuss consumer choice without going into extensive detail on utility theory. Many students find utility functions to be a more abstract concept than preference relationships. However, if you plan to discuss uncertainty in Chapter 5, you will need to cover marginal utility (section 3.5). Even if you cover utility theory only briefly, make sure students are comfortable with the term utility because it appears frequently in Chapter 4. When introducing indifference curves, stress that physical quantities are represented on the two axes. After discussing supply and demand, students may think that price should be on the vertical axis. To illustrate the indifference curves, pick an initial bundle on the graph and ask which other bundles are likely to be more preferred and less preferred to the initial bundle. This will divide the graph into four quadrants, and it is then easier for students to figure out the set of bundles between which the consumer is indifferent. It is helpful to present a lot of examples with different types of goods and see if the class can figure out how to draw the indifference curves. The examples are also useful for explaining the significance of the assumptions made about preferences. In presenting different examples, you can ask which assumption would be violated. Explaining utility follows naturally from the discussion of indifference curves. Though an abstract concept, it is possible to get students to understand the basic idea without spending too much time on the topic. You might point out that we as consumers have a goal in life, which is to maximize our utility subject to our budget constraint. When we go to the store we pick the basket that we like best and that stays within our budget. From this we derive demand curves. Emphasize that it is the ranking that is important and not the utility number, and point out that if we can graph an indifference curve we can certainly find an equation to represent it. Finally, what is most important is the rate at which consumers are willing to exchange goods (the marginal rate of substitution) and this is based on the relative satisfaction that they derive from each good at any particular time. this is based on the relative satisfaction that they derive from each good at any particular time....
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- Spring '09