Theory of Consumer Behavior

Chapter 4 Theory of Consumer conduct Economics 11 UPLB Prepared by T. B. Paris, Jr. December 11, 2007 Theory of Consumer expression ? ? ? Useful for understanding the demand place of the market. gain amount of satisfaction derived from the usance of a commodity . measurement units ? utils Utility concepts ? ? cardinal receipts assumes that we fecal matter cite values for utility(prenominal), (Jevons, Walras, and Marshall). E. g. , derive 100 utils from take in a slice of pizza no. utility approach does not point values, instead works with a be of preferences. Pareto, Hicks, Slutsky) enumerate utility and borderline utility ? ? perfect utility (TU) the overall level of satisfaction derived from consuming a ingenuous or service fringy utility (MU) additional satisfaction that an individual derives from consuming an additional unit of a keen or service. ? TU MU = ? Q make sense utility and fringy utility Example (Table 4. 1) Q 0 1 2 3 4 5 6 7 TU 0 20 27 32 35 3 5 34 30 36 MU 20 7 5 3 0 -1 -4 ? ? ? ? TU, in general, increases with Q At some point, TU contribute start falling with Q see Q = 6) If TU is increasing, MU 0 From Q = 1 onwards, MU is declining ? principle of diminishing marginal utility ? As much and more of a trade good are consumed, the plow of consumption will (at some point) mother smaller and smaller additions to utility Total Utility Curve TU 35 Total utility(in utils) 30 25 20 15 10 5 0 1 2 3 4 5 Quantity 6 Q Figure 4. 1 Marginal Utility Curve MU Marginal utility (in utils) 20 15 10 5 0 -5 Figure 4. 2 1 2 3 4 5 6 Quantity Q Consumer chemical equilibrium ? ?So far, we have assumed that some(prenominal) amount of goods and services are forever and a day available for consumption In reality, consumers sheath constraints (income and monetary values) Limited consumers income or budget ? Goods can be obtained at a price ? Some simplifying assumptions ? ? ? ? Consumers objective to maximize his/her utility subject to inc ome constraint 2 goods (X, Y) Prices Px, Py are fixed Consumers income (I) is accustomed Consumer Equilibrium ? Marginal utility per peso ? additional utility derived from sp curioing the succeeding(prenominal) peso on the good MU MU per peso = PConsumer Equilibrium ? Optimizing condition MU X MU Y = PX PY ? If MU X MU Y PX PY ? spend more on good X and less of Y wide-eyed Illustration ? Suppose X = fishball Y = siomai ? Assume PX = 2 PY = 10 Numerical Illustration Qx 1 2 3 4 5 6 TUX 30 39 45 50 54 56 MUX 30 9 6 5 4 2 MUx Px 15 4. 5 3 2. 5 2 1 QY 1 2 3 4 5 6 TUY 50 one hundred five 148 178 198 213 MUY 50 55 43 30 20 15 MUy Py 5 5. 5 4. 3 3 2 1. 5 ? ? 2 potential optimum positions combine A ? X = 3 and Y = 4 ? TU = TUX + TUY = 45 + 178 = 223 ? faction B ? ? X = 5 and Y = 5 TU = TUX + TUY = 54 + 198 = 252 ? strawman of 2 potential equilibrium positions suggests that we pick up to consider income. To do so allow us examine how much severally consumer spends for each gang. E xpenditure per combination ? ? Total expenditure = PX X + PY Y combination A 3(2) + 4(10) = 46 ? gang B 5(2) + 5(10) = 60 ? Scenarios If consumers income = 46, hence the optimum is attached by combination A. .Combination B is not inexpensive ? If the consumers income = 60, then the optimum is given by Combination B. Combination A is affordable but it yields a lower level of utility ? end