Managerial Economics & Business Strategy Chapter 4
Managerial Economics & Business Strategy Chapter 4
The Theory of Individual Behavior
Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008
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
Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008
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.
Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008
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
Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008
Consumer Preference Ordering Properties
• • • • Completeness More is Better Diminishing Marginal Rate of Substitution Transitivity
Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008
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 Theory of Individual Behavior
Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008
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
Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008
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.
Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008
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
Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008
Consumer Preference Ordering Properties
• • • • Completeness More is Better Diminishing Marginal Rate of Substitution Transitivity
Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008
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