Comm220 Ch 3 - CHAPTER 3 CONSUMER BEHAVIOR Key Concepts and...

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Source: Pindyck and Rubinfeld (2009), Microeconomics , 7 th Ed., Pearson Prentice Hall, Chapter 3. 1 CHAPTER 3 – CONSUMER BEHAVIOR Key Concepts and Topics How are consumer preferences used to determine demand? How do consumers allocate income to the purchase of different goods? How do consumers with limited income decide what to buy? How can we determine the nature of consumer preferences for observations of consumer behavior? Consumer Behavior Theory of consumer behavior The explanation of how consumers allocate income to the purchase of different goods and services There are three steps involved in the study of consumer behavior 1. Consumer Preferences To describe how and why people prefer one good to another 2. Budget Constraints People have limited incomes 3. Consumer Choices Given preferences and budget constraints, 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 list with specific quantities of one or more commodities How do individuals choose between market baskets containing different goods Basic Assumptions Preferences are complete Consumers can rank market baskets. For example, for two baskets A and B, prefer A to B, prefer B to A, or feel indifferent between the two. Note: preferences ignore costs Preferences are transitive If prefer A to B, and B to C, then must prefer A to C Consumers always prefer more of any good to less More is better
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Source: Pindyck and Rubinfeld (2009), Microeconomics , 7 th Ed., Pearson Prentice Hall, Chapter 3. 2 Indifference Curves Consumer preferences can be represented graphically using indifference curves Market Basket Units of Food Units of Clothing A 20 30 B 10 50 D 40 20 E 30 40 G 10 20 H 10 40 Plotting the market baskets we can make some immediate observations about preferences – More is better Suppose the consumer is indifferent among B, A and D Food (units per week) Clothing (units per week) 50 40 30 20 10 10 20 30 40 A is preferred to G, while E is preferred to A A cannot be compared with B, D or H with more information Food (units per week) Clothing (units per week) 50 40 30 20 10 10 20 30 40 U 1 represents all combinations of market baskets that provide a consumer with the same level of satisfaction Indifferent among B, A and D E is preferred to U 1 U 1 is preferred to H and G Any basket lying above and to the right of the indifference curve is preferred to those lying on or below the curve
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Source: Pindyck and Rubinfeld (2009), Microeconomics , 7 th Ed., Pearson Prentice Hall, Chapter 3. 3 Indifference curve slopes downward (not upward) to satisfy the “more is preferred to less” assumption (What happens when it slopes upward?) Indifference Map What is an indifference map?
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