consumer behaviour
TRANSCRIPT
![Page 1: Consumer Behaviour](https://reader036.vdocument.in/reader036/viewer/2022062519/55cf9815550346d033957908/html5/thumbnails/1.jpg)
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Indifference Curve
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U=10
An indifference curve (IC, )is a line joining all the points (representing different baskets of goods) giving the same utility to an individual.
Good X
Good Y
0
What is an indifference curve?
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An indifference map is a set of ICs showing the preference of an individual.
What is an indifference map?
U=10U=20
U=30
Good Y
Good X0
preference
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Properties of Indifference Curves of Two Goods
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U=10
Good Y
Good X0
+X
-Y
1. ICs of two goods are negatively sloped Keeping utility constant, along an IC,
a basket with more units of good X must have _____ units of good Y.fewer
negative
(Options: more / fewer / positive / negative)
Slope of an IC of two goods (= Δ Y/ Δ X)
must be ________.
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If quantities of good X and good Y can be increased or decreased by infinitesimal amounts, the ICs are continuous. Why?
2. Indifference curves are continuous
U=10
Good Y
Good X0
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Along U2: point A = point C = U2
Along U1: point A = point B = U1
What is the utility of point A, = U1 or U2?
3. Indifference curves can never intersect
U of the intersection point logical contradiction
A
B
C
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U1
U2
U3
Good Y
Good X0
The higher the IC , the higher the utility (U3 > U2 > U1). Why?
The higher the IC , the higher the utility (U3 > U2 > U1). Why?
If a consumer knows his preference on every basket of commodities, the commodity plane will be fully covered by ICs. Why?
4. Full coverage
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5. Indifference curves of two goods are convex to the origin
U1
Good Y
Good X0
+1X
-Y
As the consumption of good X rises, MRS (the slope) falls. Why?
convex
As the IC becomes flatter & flatter, its shape is _______ to the origin.
The numerical value of the slope of an IC (+1X -?Y) is equal to the MRS. Why?
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Other Shapes of Indifference Curves
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Y (A good)
X (A neuter)0
U2
U1
U3
U3>U2>U1
1. X is a neuter and Y is a good
Any increase or decrease in the quantity of X makes no difference to the consumer.
Why?
ICs are ___________.horizontal
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ICs are _________ sloping with a/an
_________slope.
2. X is a bad and Y is a good U3>U2>U1
U1
U2
U3
0
Y (A good)
X (A bad)
Why?
upwardincreasing
+X
+Y
To keep U constant, in a bad (+X) requires in a good (+Y) as a compensation.
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3. X is a commodity with a satiation threshold (beyond which X turns from a good to a bad)
0
Good Y
X
U1
U2
U3
U3>U2>U1
X becomes a bad X is a good
ICs are __________.
Why?
U-shaped
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4. X and Y are perfect substitutes
Good X (pack of 5 kg rice)
Good Y (pack of 8 kg rice)
0 U1 U2 U3
U3>U2>U1
ICs are _________ sloping _______ lines.
Why?
downward
straight
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5. X and Y are perfect complements
Good Y (left shoes)
Good X (right shoes)0
ICs are __________.
45o U3>U2>U1
U1
U2
U3
Why?
right-angled
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Budget Line
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It is also called the budget constraint.
What is a budget line?
Budget line (BL) or consumption possibility curve is a boundary showing the largest possible combinations of goods that a consumer can buy in a market, given his money income and market prices of the goods.
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Y
X0
Given I = $100, PX = $20 & PY = $25
The maxi. amount of X one can buy
= ___________$100/$20 = 5
$100/$25 = 4
$20/$25 = 0.8
4
5
+1X
-0.8Y
Derivation of a BL:
To buy 1 more unit of X, one forgoes =____________ unit of Y.
The maxi. amount of Y one can buy
= ___________
The BL is a downward sloping straight line.
The slope of BL = cost of consuming an additional unit of good X in terms of good Y.
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Y
X0
A
C
B
Point A: Expenditure ____ Income
Point B: Expenditure ____ Income
Point C: Expenditure ____ Income
Features:
<=>
(Options: > = < )
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Equation of budget line
X PX + Y PY = I
Expenditure on good X
Expenditure on good Y
Money income of the consumer
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Changes in budget constraints 1. Changes in income
When one’s income increases, the budget line will shift ______ in a parallel manner, and vice versa.
Y
0 X
outward
Why?
in income
in income
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Y
0X
2. Proportionate changes in prices
When prices of both goods rise by the same proportion, the budget line will shift _______ in a parallel manner, and vice versa.
inward
Why?
A proportionate in all money prices
A proportionate in all money prices
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Y
0X
3. Disproportionate changes in prices
A rise in Px
A fall in Px
tilt inward
tilt outward
When PX , the budget line will _________ and become steeper. Why?
When PX , the budget line will __________ and become _______. Why?
flatter
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Consumer Equilibrium
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Optimum (最優點 ) or equilibrium (均衡 ) is the best choice of an economic agent in achieving his objective.
What is a consumer equilibrium?
Optimality conditions (最優性條件 ) or equilibrium
conditions (均衡條件 ) are descriptions on thedefining features of the optimum or the equilibrium.
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Interior solution When a consumer buys both goods X & Y,
i.e., the equilibrium is not one of the _________ on the budget line, the equilibrium is called
an interior solution (內解點 ).
intercepts
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It is the tangency point, the only point on the budget line reaching the highest IC attainable.
U1
U3
Y
X0
U3>U2>U1
X*
Y*
From observation, the best choice achievable is _____________.
Equilibrium: From observation
E*
U2
E* (X*, Y*)
Why?
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Equilibrium conditions:
U1
U2
U3
Y
X0
U3>U2>U1
E*
X*
Y*
1. The consumer equilibrium must lie ____ the BL.
2. The consumer equilibrium is the ____________ at which the slope of IC equals the slope of BL.
on
tangency point
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Slope of indifference curve Slope of budget line
1. =ΔY/ΔX, holding utility constant
=ΔY/ΔX, holding expenditure or income constant
2. = Marginal rate of substitution in consumption, MRSc
= Marginal rate of substitution in exchange, MRSe
Meaning of the slopes
3. = The maximum amount of Y one is willing to pay for an additional unit of X
= The actual amount of Y one is required to pay for an additional unit of X in exchange
4. = Cost / Value? of an additional unit of X in terms of Y (=MUV)
= Cost / Value? of consuming an additional unit of X in terms of Y (= Px/Py)
Value Cost
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Buy X
MRS
c
MRS
eHow is the consumer equilibrium reached?
At point A, MRSc > MRSe (_______ of an additional X > its ________), utility can be raised if the consumer _________ units of X.
U2
U1
Y
X0
A
buys more
(Options: buys more / sells some / value / cost )
valuecost
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Sell X
MRS
e
MRSc
U2
U1
Y
X0
At point B, MRSc < MRSe (value < cost), utility can be raised if the consumer _________ units of X.
B
sells some(Options: buys some /
sells some )
How is the consumer equilibrium reached?
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U2
U1
Y
X0
MRSc = MRSe (value = cost), utility is maximized & the equilibrium is attained.
E*
How is the consumer equilibrium reached?