Chapter 5 provides knowledge of theory of consumer behavior. In this chapter, you learned to: Explain the concept of utility and the basic assumptions underlying consumer preferences; explain the equilibrium condition for an individual consumer to be maximizing utility subject to a budget constraint; use indifference curves to derive a demand curve for an individual consumer;. | Chapter 5: Theory of Consumer Behavior McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. The Consumer’s Optimization Problem Individual consumption decisions are made with the goal of maximizing total satisfaction from consuming various goods and services Subject to the constraint that spending on goods exactly equals the individual’s money income Consumer Theory Assumes buyers are completely informed about: Range of products available Prices of all products Capacity of products to satisfy Their income Requires that consumers can rank all consumption bundles based on the level of satisfaction they would receive from consuming the various bundles Typical Consumption Bundles for Two Goods, X & Y (Figure ) Properties of Consumer Preferences Completeness For every pair of consumption bundles, A and B, the consumer can say one of the following: A is preferred to B B is preferred to A The consumer is indifferent between A and B . | Chapter 5: Theory of Consumer Behavior McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. The Consumer’s Optimization Problem Individual consumption decisions are made with the goal of maximizing total satisfaction from consuming various goods and services Subject to the constraint that spending on goods exactly equals the individual’s money income Consumer Theory Assumes buyers are completely informed about: Range of products available Prices of all products Capacity of products to satisfy Their income Requires that consumers can rank all consumption bundles based on the level of satisfaction they would receive from consuming the various bundles Typical Consumption Bundles for Two Goods, X & Y (Figure ) Properties of Consumer Preferences Completeness For every pair of consumption bundles, A and B, the consumer can say one of the following: A is preferred to B B is preferred to A The consumer is indifferent between A and B Transitivity If A is preferred to B, and B is preferred to C, then A must be preferred to C Nonsatiation More of a good is always preferred to less Utility Benefits consumers obtain from goods & services they consume is utility A utility function shows an individual’s perception of the utility level attained from consuming each conceivable bundle of goods Indifference Curves Locus of points representing different bundles of goods, each of which yields the same level of total utility Negatively sloped & convex Typical Indifference Curve (Figure ) Marginal Rate of Substitution MRS shows the rate at which one good can be substituted for another while keeping utility constant Negative of the slope of the indifference curve Diminishes along the indifference curve as X increases & Y decreases Ratio of the marginal utilities of the goods Slope of an Indifference Curve & the MRS (Figure ) Quantity of good X Quantity of good Y 0 I C (360,320) 600 800 A B T T’ 360 320 .
