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Principles of Microeconomics
Theory of Consumption
How can a consumer with
LIMITED INCOME decide
which goods and services
to buy?
Utility
Utility is defined as the satisfaction derived from the consumption of a commodity which
determines consumption and demand behavior.
Preferences Budget Constraints
Factors Influencing Behavior
Culture
Subculture
Social Class
Cultural
Reference Groups
Family
Roles & Statuses
Social
Age & Life Cycle Stage
Occupation
Economic Circumstances
Lifestyle
Personality & Self-Concept
Personal
Motivation
Perception
Learning
Beliefs & Attitudes
Psychological Buyer
Maslows hierarchy
CONSUMER PREFERENCES
Market Baskets
Market Baskets
Market Basket
Units of Food
Units of Clothing
A 20 30
B 10 50
D 40 20
E 30 40
G 10 20
HOW WOULD YOU RANK THESE BASKETS??? Are there any baskets you definitely prefer?
Food (units)
10
20
30
40
10 20 30 40
Clothing
(units)
50
G
A
E
B
D
Market Basket
Units of F
Units of C
A 20 30
B 10 50
D 40 20
E 30 40
G 10 20
Food (units)
10
20
30
40
10 20 30 40
Clothing
(units)
50
G
A
E
B
D D has more
food but less
clothing than
A.
E has more
food & more
clothing than
A.
B has less food but more
clothing than A.
G has less
food & less
clothing
than A.
Completeness
Transitivity
More is better than less
Prefer to
to Or
Or, they’re indifferent between &
Completeness
14
Chocolate milk Tea Lemonade
Transitivity
More is better than less
GREED
The indifference curve U1 that
passes through market basket
A shows all baskets that give
the consumer the same level of
satisfaction as does market
basket A; these include
baskets B and D.
An Indifference Curve
Indifference Curves
Our consumer prefers basket
E, which lies above U1, to A,
but prefers A to H or G, which
lie below U1.
Income and Substitution Effects
The Marginal Rate of Substitution
Food (units)
10
20
30
40
10 20 30 40
Clothing
(units)
50
U1
X
W
• Suppose Jo is willing to give up 3 units of C to get 1 additional unit of F.
• Jo’s MRS of F for C is the maximum amount of C she’s willing to give up to obtain 1 additional unit of F.
• MRS (F for C) = –C/F = –(–3)/1 = 3
Give up 3 units of C
To get 1 unit of F
Marginal Rate of Substitution MRS F = Food, C = Clothing
MRS (F for C) = -C/F
• Suppose BOB is willing to give up 2 units of C to get 1 additional unit of F.
Give up 2 units of C
To get 1 unit of F
Meaning/Use of MRS MRS describes the intensity of prefs
Notice Bob will give up fewer C to get 1 extra F. This implies C is more valuable and F is less valuable to him, as compared to Jo MRS (F for C) = –C/F = –(–2)/1 = 2
Budget Constraints
The Budget Line
Consumer Choices
RUDOLPH D. VELASCO, MM
R214b, QMS Office, Main Building, MQC Main Monday to Tuesday 5:00- 8:00 pm 09083016693 [email protected] http://istudyguide.weebly.com
Photo Sources
• http://abhinavpmp.com/wp-content/uploads/market-competition-advantages.jpg
• http://i.kinja-img.com/gawker-media/image/upload/s--h-I4LZJb--/18ixlosijjif7jpg.jpg
• http://2.bp.blogspot.com/-f2_XvRfDCMw/UyIPk_gArYI/AAAAAAAAAFo/rEGd2Lu2 hqY/s1600/choice_screen_01.png
• http://timvandevall.com/wp-content/uploads/2013/11/Maslows-Hierarchy-of-Needs.jpg
• http://www.economicsuk.com/blog/rpibasket2.jpg
• https://www.binkd.com/wp-content/uploads/2014/02/Checklist.jpg
• http://www.slideteam.net/media/catalog/product/cache/1/image/9df78eab33525d08d6e5fb8d27136e95/3/d/3d_man_standing_on_dollar_with_dart_and_red_arrows_stock_photo_Slide01.jpg
• http://www.foreclosuredefenseresourcecenter.com/wp-content/uploads/2011/08/Substitution-of-Trustee-California-Civil-Code-Section-2934.jpg
• http://jacksonvillepropertymanagementpros.com/wp-content/uploads/2011/06/7-cut-utility-bills_-e_1370.jpg
• http://thumbs.dreamstime.com/x/budget-constraint-9920510.jpg
• http://blogs-images.forbes.com/sungardas/files/2014/09/IT-Budget-Line-Item_forbes.jpg
• http://b.fastcompany.net/multisite_files/fastcompany/imagecache/1280/poster/2013/09/3016957-poster-p-1-google-will-power-the-online-learning-revolution-with-moocorg.jpg
• http://cinemaboyz.com/wp-content/uploads/2013/11/steamsale.jpg
• Graphs and Quick Activity Source: Introductory Microeconomics by Pagoso, Dinio, Villasis, Meneses and Veloso
