demand and consumer behavior
Post on 20-Jan-2015
3.427 Views
Preview:
DESCRIPTION
TRANSCRIPT
Demand And Consumer Behavior
Chapter 5
Topics:
Utility Types of utility Law of Diminishing Marginal utility Individual and market demand curve Equi marginal Principal Consumer welfare or Surplus
Numerical Example
Consumed Q T U Mu
0 0
1 4 4
2 7 3
3 9 2
4 10 1
5 10 0
Total Utility
0
2
4
6
8
10
12
0 1 2 3 4 5 6
Quantity
TU
Consumed Q T U
0 0
1 4
2 7
3 9
4 10
5 10
Marginal utility
Marginal Utility
00.5
11.5
22.5
33.5
44.5
0 1 2 3 4 5 6
Quantity
MU
Mu
4
3
2
1
0
Equi marginal Principal : Equal Marginal Utilities per dollar for every good:
MU1 = MU2
P1 P2
Quantity 1Quantity 2 Quantity
Pric
e
Pric
e
D1 D2
Q=Q1+Q2
Market demand curve
Pric
e
From Individual to market demand curve
1 2 3
5 55
Consumer welfare or Surplus
Consumer welfare from a good is the benefit a consumer gets from consuming that good minus what the consumer paid to buy he good.
Consumer surplus: the monetary difference between what a consumer is willing to pay for the quantity of good actually costs is called consumer surplus
Quantity
prices
1 2 3 4
1
2
3
4
P=2
Quantity
pric
es
Expenses
Consumer Surplus
Marginal Willingness to pay for last unit
Consumer Surplus through Demand curve
Conti….
Budget line Change in Budget Line Budget equation
Budget Line
Food Clothing
4 0
3 1.5
2 3
1 4.5
0 6
Budget Line
0
1
2
3
4
5
6
7
0 1 2 3 4 5
Food
Clo
thin
g
Pf = Rs40
Pc =Rs30
Slope = Pf/ Pc
Budget line Equation
Y = Pf x Qf +Pc x QcInterceptQf =0Y = Pc x QcY / Pc = QcSlope Pc x Qc = Y -Pf x Qf Qc = Y -Pf x Qf PcQc = Y -Pf x Qf Pc Pc
Change in Budget Line (Change in income)
Clo
thin
g
Food
B2
B
Y / Pf
Y / Pc
Y2 / Pc
Y2 / Pf
Change in Budget Line (Change in Price)
Clo
thin
g
B2
B
Y / Pf Y / Pf2
Y / PcPrice decrease
Conti….
Indifference Curve Properties of IC Marginal rate of substitution
Table
Clothing Food
1 2 3 4 5 6
1 10 14 17 20 22 24
2 14 20 24 28 32 35
3 17 24 30 35 39 42
4 20 28 35 40 45 49
5 22 32 39 45 50 55
6 24 35 42 49 55 60
Satisfaction level 24
Cloth Food
1 6
2 3
3 2
6 1
Indifference Curve 1
Satisfaction level 24
Cloth Food
1 6
2 3
3 2
6 1
Indifference curve
0
1
2
3
4
5
6
7
0 2 4 6 8
Food
Clo
thin
g
Indifference Curve 2
Clothing Food
1 2 3 4 5 6
1 10 14 17 20 22 24
2 14 20 24 28 32 35
3 17 24 30 35 39 42
4 20 28 35 40 45 49
5 22 32 39 45 50 55
6 24 35 42 49 55 60
Satisfaction level 35
Cloth Food
2 6
3 4
6 2
indifference curve 2
0
1
2
3
4
5
6
7
0 2 4 6 8
Food
Clo
thin
g
Indifference MAP
1, 6
2, 3
3, 2
6, 1
2, 6
3, 4
6, 2
0
1
2
3
4
5
6
7
0 1 2 3 4 5 6 7
Food
Clo
thin
g
Lo
Indifference Map
Indifference Curve Properties
1. The father an indifference curve is from the origin, the greater level of satisfaction
2. Indifference curve do not cross
3. Its slope downward
Marginal rate of substitution (slope)
Indifference curve
0
1
2
3
4
5
6
7
0 2 4 6 8
Food
Clo
thin
g
MRS = ΔC/ ΔF
= 3/1
Perfect substitute & Perfect complement
Orange Juice
App
le J
uice
Right Shoe
Left
Sho
e
Food
Clo
thin
g
Q =1
a. Perfect substitute b. Perfect complement
Typical IC lie between the extreme cases of straight lines and right angle.
Along a curved IC, the ability to substitute one input for another varies.
top related