Managerial Economic and Business Analysis
Managerial Economics & Business Strategy
Chapter 4 The Theory of Individual Behavior
McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
Overview
I. Consumer Behavior
– Indifference Curve Analysis. – Consumer Preference Ordering.
II. Constraints
– The Budget Constraint. – Changes in Income. – Changes in Prices.
III. Consumer Equilibrium IV. Indifference Curve Analysis & Demand Curves
– Individual Demand. – Market Demand.
4-2
Consumer Behavior
Consumer Opportunities
– The possible goods and services consumer can afford to consume.
Consumer Preferences
– The goods and services consumers actually consume.
Given the choice between 2 bundles of goods a consumer either:
– Prefers bundle A to bundle B: A f B. – Prefers bundle B to bundle A: A p B. – Is indifferent between the two: A ∼ B.
4-3
Indifference Curve Analysis
Indifference Curve
– A curve that defines the combinations of 2 or more goods that give a consumer the same level of satisfaction. Good Y III. II. I.
Marginal Rate of Substitution
– The rate at which a consumer is willing to substitute one good for another and maintain the same satisfaction level. Good X
4-4
Consumer Preference Ordering Properties
Completeness More is Better Diminishing Marginal Rate of Substitution Transitivity
4-5
Complete Preferences
Completeness Property
– Consumer is capable of expressing preferences (or indifference) between all possible bundles. (“I don’t know” is NOT an option!) • If the only bundles available to a consumer are A, B, and C, then the consumer is indifferent between A and C (they are on the same indifference curve). will prefer B to A. will prefer B to C.
Good Y III. II. I.
A B
C
Good X
4-6
More Is Better!
More Is Better Property
– Bundles that have at least as much of every good and more of some good are preferred to other bundles. • Bundle B is preferred to A since B contains at least as much of
Chapter 4 The Theory of Individual Behavior
McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
Overview
I. Consumer Behavior
– Indifference Curve Analysis. – Consumer Preference Ordering.
II. Constraints
– The Budget Constraint. – Changes in Income. – Changes in Prices.
III. Consumer Equilibrium IV. Indifference Curve Analysis & Demand Curves
– Individual Demand. – Market Demand.
4-2
Consumer Behavior
Consumer Opportunities
– The possible goods and services consumer can afford to consume.
Consumer Preferences
– The goods and services consumers actually consume.
Given the choice between 2 bundles of goods a consumer either:
– Prefers bundle A to bundle B: A f B. – Prefers bundle B to bundle A: A p B. – Is indifferent between the two: A ∼ B.
4-3
Indifference Curve Analysis
Indifference Curve
– A curve that defines the combinations of 2 or more goods that give a consumer the same level of satisfaction. Good Y III. II. I.
Marginal Rate of Substitution
– The rate at which a consumer is willing to substitute one good for another and maintain the same satisfaction level. Good X
4-4
Consumer Preference Ordering Properties
Completeness More is Better Diminishing Marginal Rate of Substitution Transitivity
4-5
Complete Preferences
Completeness Property
– Consumer is capable of expressing preferences (or indifference) between all possible bundles. (“I don’t know” is NOT an option!) • If the only bundles available to a consumer are A, B, and C, then the consumer is indifferent between A and C (they are on the same indifference curve). will prefer B to A. will prefer B to C.
Good Y III. II. I.
A B
C
Good X
4-6
More Is Better!
More Is Better Property
– Bundles that have at least as much of every good and more of some good are preferred to other bundles. • Bundle B is preferred to A since B contains at least as much of