Chapter iv for student
- 1. 4/3/2011 1 CHAPTER IV: THEORY OF CUSTOMERS’ BEHAVIOURS When consumers go to grocery stores to buy their chickens for Lunar New Year dinner, they may be disappointed that the price of chicken is as high as it is. At the same time, when farmers bring to market the chickens they have raised, they wish the price of turkey were even higher. These views are not surprising: -Buyers always want to pay less, -Sellers always want to get paid more. But is there a “right price” for chicken from the standpoint of society as a whole? I.Theory of Utility 1. Definitions Utility (U): ◦ Definition: utility is a measure of happiness or satisfaction ◦ Characteristics: Personalized Vague Positive relationship with the price which consumer is willing to pay Total utility (TU) ◦ Definition: the satisfaction consumer gains while he consume total of a particular goods or services Marginal utility (MU) ◦ Definition: the change in total utility brought by an additional unit of goods consumed
- 2. 4/3/2011 2 2.The law of Diminishing Marginal Utility As a person increases consumption of a product - while keeping consumption of other products constant - there is a decline in the marginal utility that person derives from consuming each additional unit of that product 3. The relationship between the law of diminishing marginal utility and the demand curve The demand curve for a good reflects consumers’ willingness to pay for it. When the price of a good rises, consumers are willing to pay for fewer units, so the quantity demanded falls. We now look more deeply at the decisions that lie behind the demand curve.
- 3. 4/3/2011 3 -4 -2 0 2 4 6 8 10 1 2 3 4 5 6 MU Curve 4. Consumption Surplus (CS) - Definition: Consumer surplus is the difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually do pay (i.e. the market price for the product). Note: The level of consumer surplus at equilibrium point is shown by the area under the demand curve and above the ruling market price as illustrated in the diagram below:
- 4. 4/3/2011 4 II.The theory of consumer’s choice When you walk into a store, you are confronted with thousands of goods that you might buy. Of course, because your financial resources are limited, you cannot buy everything that you want. You, therefore, consider the prices of the various goods being offered for sale and buy a bundle of goods that, given your resources, best suits your needs and desires 1. Consumer’s preference a. Assumptions: - Consumer can arrange, compare bundles of goods - Consumer prefers more to less - The comparison can be transferred A>B B>C A>C b. Indifference Curve (IC or U) b. 1 Definition: A curve that shows consumption bundles that give the consumer the same level of satisfaction
- 5. 4/3/2011 5 b.2 Five properties of indifferent curves: - IC has downward slope - ICs cannot intersect -Their slope gets steadily flatter to the right
- 6. 4/3/2011 6 Moving between 2 points on IC will result in: ∆U=0 MUx∆X + MUy∆Y = 0 - Higher indifference curves are preferred to lower ones ◦ Consumers usually prefer more of something to less of it ◦ Higher indifference curves represent larger quantities of goods than lower indifference curves. Thus, the consumer prefers being on higher indifference curves
- 7. 4/3/2011 7 - Different kinds of IC represent different preference b.3 Special cases of IC PERFECT SUBSTITUTES AND PERFECT COMPLEMENTS. - When two goods are easily substitutable, such as Coca and Pessi, the indifference curves are straight lines - When two goods are strongly complementary, such as left shoes and right shoes, the indifference curves are right angles
- 8. 4/3/2011 8 22 2.The budget line • Income and prices together determine the combinations of the goods that the consumer can afford. • The budget line separates the affordable from the unaffordable. Consider a student with a budget of 250,000VND to spend on meals and films. 0 1 2 3 4 5 6 0 2 4 6 8 10 12 Meals Films A B C D E F G Price of meals is 25,000 VND; price of films is 50,000VND. Budget Line: - Changes caused by income
- 9. 4/3/2011 9 - Changes caused by price’s change oChange in Px oPx↑:BL turn in oPx↓:BL turn out 26 III.The consumer’s choice • The choice point is at C • where the budget line is at a tangent to an IC • Points B and E are also affordable but give lower utility,being on a lower IC. U3 Quantity of meals U2 U2U1 U3 U1 BL C E B The point at which utility is maximised is found by bringing together the indifference curves (U) and the budget line (BL)