Demand and consumer behavior
- 1. Demand And Consumer Behavior Chapter 5
- 2. Topics: Utility Types of utility Law of Diminishing Marginal utility Individual and market demand curve Equi marginal Principal Consumer welfare or Surplus
- 3. Numerical Example 0 10 5 1 10 4 2 9 3 3 7 2 4 4 1 0 0 Mu T U Consumed Q
- 4. 10 5 10 4 9 3 7 2 4 1 0 0 T U Consumed Q
- 5. Marginal utility 0 1 2 3 4 Mu
- 6. Equi marginal Principal : Equal Marginal Utilities per dollar for every good: MU1 = MU2 P1 P2
- 7. From Individual to market demand curve Quantity 1 Quantity 2 Quantity Price Price D1 D2 Q=Q1+Q2 Market demand curve Price 1 2 3 5 5 5
- 8. 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
- 9. Consumer Surplus through Demand curve Quantity prices Expenses Consumer Surplus Marginal Willingness to pay for last unit
- 10. Conti…. Budget line Change in Budget Line Budget equation
- 11. Budget Line Pf = Rs40 Pc =Rs30 Slope = Pf/ Pc 6 0 4.5 1 3 2 1.5 3 0 4 Clothing Food
- 12. Budget line Equation Y = Pf x Qf +Pc x Qc Intercept Qf =0 Y = Pc x Qc Y / Pc = Qc Slope Pc x Qc = Y -Pf x Qf Qc = Y -Pf x Qf Pc Qc = Y - Pf x Qf Pc Pc
- 13. Change in Budget Line (Change in income) Clothing Food B2 B Y / Pf Y / Pc Y2 / Pc Y2 / Pf
- 14. Change in Budget Line (Change in Price) Clothing B2 B Y / Pf Y / Pf2 Y / Pc Price decrease
- 15. Conti…. Indifference Curve Properties of IC Marginal rate of substitution
- 16. Table 60 55 49 42 35 24 6 55 50 45 39 32 22 5 49 45 40 35 28 20 4 42 39 35 30 24 17 3 35 32 28 24 20 14 2 24 22 20 17 14 10 1 Food 1 2 3 4 5 6 Clothing 1 6 2 3 3 2 6 1 Food Cloth Satisfaction level 24
- 17. Indifference Curve 1 1 6 2 3 3 2 6 1 Food Cloth Satisfaction level 24
- 18. Indifference Curve 2 60 55 49 42 35 24 6 55 50 45 39 32 22 5 49 45 40 35 28 20 4 42 39 35 30 24 17 3 35 32 28 24 20 14 2 24 22 20 17 14 10 1 Food 1 2 3 4 5 6 Clothing 2 6 4 3 6 2 Food Cloth Satisfaction level 35
- 20. Indifference Map
- 21. Indifference Curve Properties The father an indifference curve is from the origin, the greater level of satisfaction Indifference curve do not cross Its slope downward
- 22. Marginal rate of substitution (slope) MRS = Δ C/ Δ F = 3/1
- 23. Perfect substitute & Perfect complement Orange Juice Apple Juice Right Shoe Left Shoe Food Clothing 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.