MANAGERIAL ECONOMICS

THEORY OF INDIVIDUAL BEHAVIOUR

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THEORY OF INDIVID BEHAVIOUR

• What is Microeconomics? – Microeconomics deals with the behavior of individual economic units

(consumers, workers, investors, owners of land, business firms etc.) as well as the markets that these units comprise

– explains how and why these units make economic decisions.

– Economic decision-making in light of “limits”: Limited incomes, limited know-how, limited natural resources, limited number of hours per week, …

– Microeconomics is about allocation of scarce resources

– Describes trade-offs that economic units face and shows how these trade-offs are best made

– Theory of consumer behavior is sub-field of microeconomics describes how consumers allocate limited resources across goods and services

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CONSUMER BEHAVIOUR;3DISTINCT STEPS

• Consumer behavior is best understood in three distinct steps: – Consumer preferences: Find a practical way to describe the reasons people

might prefer one good to another

– Budget constraints: Consumer consider prices. – Consumers have limited incomes which restrict the quantities of goods they

can buy. – What does a consumer do in this situation? find answer by combining 1.)

and 2.)

– Consumer choices Given their preferences and limited incomes, consumers choose to buy combinations of goods that maximize their satisfaction.

– These combination will depend on the price of various goods. – Understanding consumer choice (and individual demand) will help us

understand market demand.

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WHAT DO ECONOMIST DO

• Are assumptions about consumer behavior realistic? Consumer have preferences

among the various goods. • Consumers face budget constraints which puts limits on what they can buy. • Consumers choose goods and services so as to maximize their satisfaction (“homo

oeconomicus”).

• •It is hard to argue with the first two. Third one? • •Are consumers as rational and informed as economists often make them out to

be? Behavioral economics incorporates more realistic assumptions about rationality and decision making.

• Model of rational consumers is simplification, but has also been successful in explaining much of what we actually observe.

• Model of rational consumers is a basic “workhorse” model of economics and has been used widely in fields such as economics, finance, and marketing.

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OVERVIEW

• Consumer Behavior • Indifference Curve Analysis. • Consumer Preference Ordering.

• II. Constraints • The Budget Constraint. • Changes in Income. • Changes in Prices.

• III. Consumer Equilibrium • IV. Indifference Curve Analysis & Demand Curves • Individual Demand. • Market Demand.

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CONSUMER PREFERENCES

• Economic model of (rational) consumer behavior is simple: people

choose best things they can afford. • •Let us first clarify the economic concept of “best things”

(consumer preferences) and then clarify the meaning of “can afford“ ( budget constraints)

• •Consumption bundle: complete list of goods and services that are involved in a consumer choice Includes also a description of when and where goods and services become available.

• •Given the choice between 2 bundles of goods a consumer either: Prefers bundle A to bundle B.

• Prefers bundle B to bundle A. • Is indifferent between the two: A ∼ B.

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