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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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