consumer behavior
DESCRIPTION
Consumer BehaviorTRANSCRIPT
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Managerial Economics: BUS 525-2Lecture 3
Dr. AhsanuzzamanDepartment of Economics
North South University, Dhaka, BangladeshEmail: [email protected]; [email protected]
February 14, 2015
Managerial Economics: BUS 525-2
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Consumer Behavior
Theory of consumer behavior: Description of how consumersallocate incomes among different goods and services tomaximize their well-being.Steps to understand consumer behavior
1 Consumer Preferences: The first step is to find apractical way to describe the reasons people might preferone good to another. Presentation of consumers preferences for variousgoods described graphically and algebraically.
2 Budget Constraints: Consider price and limited income. Combine Consumer preferences and budget constraintstogether.
3 Consumer Choices: Given preferences and budgetconstraints, consumers choose to buy combinations ofgoods that maximize their satisfaction.
Managerial Economics: BUS 525-2
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Consumer Preferences
Assumption: Consumers make purchasing decisions rationally(really?)Consumer PreferencesMarket Baskets/Bundles: List with specific quantities of oneor more goods.
The theory of consumer behavior explains whether to preferone market basket to another.
Managerial Economics: BUS 525-2
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Consumer Preferences
Basic Assumptions about Preferences
1 Completeness: Preferences are assumed to be complete Consumers can compare and rank all possible baskets. for any two baskets A and B, consumer prefers either Ato B or prefers B to A, is indifferent between the two.Indifferent the person will be equally satisfied with eitherbasket
2 Transitivity: Preferences are transitive (consistent).Baskets A,B, and C...
3 More is better than less Locally non-satiated.
Managerial Economics: BUS 525-2
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Consumer Preferences
Indifference Curves (IC)An IC represents all combinations of market baskets thatprovide a consumer with the same level of satisfaction.
Figure: Describing Individual PreferencesManagerial Economics: BUS 525-2
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Consumer Preferences
Indifference Curves (IC)
Figure: An Indifference Curve
Managerial Economics: BUS 525-2
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Consumer Preferences
Indifference Maps (IC): Graph containing a set of indifferencecurves showing the market baskets among which a consumeris indifferent
Figure: Indifference maps
Managerial Economics: BUS 525-2
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Consumer Preferences
The Shapes of ICs:The Marginal Rate of Substitution:
Figure: The MRSManagerial Economics: BUS 525-2
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Consumer Preferences
Convexity: The MRS falls as we move down the IC gives ashape which is convex to the origin and is termed as convexpreference".This provides an additional assumption about the preference:Diminishing Marginal Rate of Substitution:
Figure: The MRS
Managerial Economics: BUS 525-2
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Consumer Preferences
Perfect Substitutes and Perfect Complements:
Figure: Perfect Complements and Perfect SubstitutesManagerial Economics: BUS 525-2
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Consumer Preferences
BIG QUESTION:
What will be the IC of bads????
Managerial Economics: BUS 525-2
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Consumer Preferences
Utility: Numerical score representing the satisfaction that aconsumer gets from a given market basketUtility Functions: Formula that assigns a level of utility toindividual market baskets. Example: U(F ,C) = F + 2C. Or forthe figure below: U(F ,C) = FC
Figure: Utility Functions and Indifference CurvesManagerial Economics: BUS 525-2
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Consumer Preferences
Ordinal Utility Function: Utility function that generates aranking of market baskets in order of most to least preferredCardinal Utility Function: Utility function describing by howmuch one market basket is preferred to other
Managerial Economics: BUS 525-2
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Budget Constraints
Budget constraints: Constraints that consumers face as aresult of limited incomes The Budget Line: All combinations ofgoods for which the total amount of money spent is equal toincome
Figure: Mkt basket and thebudget line Figure: A budget line
Managerial Economics: BUS 525-2