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CHAPTER 3-CONSUMER BEHAVIOR - Coggle Diagram
CHAPTER 3-CONSUMER BEHAVIOR
theory of consumer behavior
consumer preferences
budget constraints
consumer choices
Consumer Preferences
completeness
when asked which bundle they prefer, consumers have a definite answer- they can compare and rank all bundles
these preferences ignore costs
transitivity
consumer is consistent in their choices-> prefer A to B and B to C than prefer A to C
necessary for consumer consistency
More is better than less
goods are assumed to be desirable- never satisfied/ satiated
prefer the bundle with higher quantity- consumers always prefer more to less
does a consumer prefer one market basket to another?
Indifference curves
- shows all combinations of marekt baskets with same satisfaction--
Indifference Maps
- shows a set of indifference curves- describes a person's preferences
indifference curves CANNOT intersect
Marginal Rate of Substitution between two goods is measured by the slope of the indifference curve
MRS is smaller the more of the good their is on the horizontal axis
Diminishing MRS- mrs diminishes, curve is coves
slope = MuF/ MuC = PF/PC
4.
Diminishing Marginal Rate of Substitution
Utility
- the satisfaction a consumer gets from a market basket
Utility Function
U (F,C ) = FC
MRS = -DC/DF = MUF/MUC
Perfect Substitutes & Perfect Complements
Perfect sustitutes
- MRS of one good for the other is constant
Perfect complements
- MRS = 0 or infinite
indifference curves are right angles
Ordinal vs Cardinal utility
ordinal utility function
- order fo most to least preferred
cardinal utility function
- how much one is preferred to another
Budget Constraints
constraint as a result of limited income
budget line-
the combinations of goods the consumer can puchase given their income and prices
slope indicates
opportuntiy cost
of buying an extra unit
change in income -> shift parallel
change in price-> rotate about one intercept
Consumer Choice
maximising basket must be
:
located on budget line
give consumer most preferred combination of goods and services
maximise satisfaction where indiferrence curve is tangent to budget line - in equilibrium
Marginal benefit = marginal cost
corner solution
MRS not equal to slope of budget line
consumer maxismises satisfaction by consuming only one of two goods
Revealed preference
consumer choses one basket over another even though its more expensive- must prefer the chosen basket
