Demand & Consumer Behavior - Chapter 5

7/26/2019 Demand & Consumer Behavior - Chapter 5

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Demand &

Consumer Behavior Chapter 5



Topics

• Choice & utility theory

– Cardinal utility

– Ordinal utility

– Demand theory

• From individual to market demand

• Applications – Economics o addiction

– !arado" o value

–Consumer surplus



Chapter 5

Table 5-1



The #a$ o Diminishin%

ar%inal 'tility

Chapter 5

Figure 5-1



Derivin% the demand curve

• 'tility ma"imi(ation – )asic premise

• E*uimar%inal principle –

– E*ual mar%inal utilities per peso or every%ood

– +eeded or utility ma"imi(ation

• !rice and *uantity demanded – inverserelationship



E*uimar%inal !rinciple

.....2

2

1

1==

P

MU

P

MU good good



arket demand

• arket demand, hori(ontal sum oindividual demand curves

•Demand shits – -ncome chan%es

• +ormal %oods

• -nerior %oods

– .u)stitutes & complements



arket Demand Derived rom

-ndividual Demands

Chapter 5

Figure 5-2



Demand Curve .hits $ith Chan%es

in -ncome or in Other /oods0 !rices

Chapter 5

Figure 5-3



1ey concepts

• .u)stitution eect

• -ncome eect

• Elasticity – !rice elasticity

– -ncome elasticity

• .u)stitutes• Complements

• -ndependents



.ome applications

• Economics o addiction

• !arado" o value

• Consumer surplus



Chapter 5

Table 5-2



Demand or Addictive .u)stances

)y 2ard3Core 'sers

Chapter 5

Figure 5-4



Demand or Addictive .u)stances

)y Casual 'sers

Chapter 5

Figure 5-5



Because o Diminishin% ar%inal 'tility4

Consumer0s .atisaction E"ceeds hat -s !aid

Chapter 5

Figure 5-6

C



Total Consumer .urplus -s the Area under

the Demand Curve and a)ove the !rice #ine

Chapter 5

Figure 5-7

Ch 5



Chapter 5

Table 5-3



Economic 6ationality

• The principal )ehavioral postulate is that adecisionmaker chooses its most preerredalternative rom those availa)le to it7

• The availa)le choices constitute thechoice set7

• 2o$ is the most preerred )undle in thechoice set located8



6ational Constrained Choice

x1

x2




x1

x2Utility




Utility x2

x1




x1

x2

Utility




Utility

x1

x2




Utility

x1

x2

Affordable, but not

the most preferred

affordable bundle.




x1

x2

Utility

Affordable, but not

the most preferred

affordable bundle.

The most preferred

of the affordablebundles.




x1

x2

Utility




Utility

x1

x2




Utilityx

1

x2




x1

x2




x1

x2

Affordable

bundles




x1

x2

Affordable

bundles

More preferred

bundles




Affordablebundles

x1

x2

More preferred

bundles




x1

x2

x1*

x2*




x1

x2

x1*

x2*

(x1*,x2*) is the mostpreferred affordable

bundle.




• The most preerred aorda)le )undle iscalled the consumer0s O6D-+A69DEA+D at the %iven prices and )ud%et7

• Ordinary demands $ill )e denoted )y":;<p:4p=4m> and "=;<p:4p=4m>7




• hen ":; ? @ and "=; ? @ the demanded

)undle is -+TE6-O67

• - )uyin% <":;4"=;> costs m then the

)ud%et is e"hausted7




x1

x2

x1*

x2*

(x1*,x2*) is interior.

(x1*,x2*) exhausts the

budget.




x1

x2

x1*

x2*

(x1*,x2*) is interior.(a) (x1*,x2*) exhausts the

budget p1x1* ! p2x2* " m.




x1

x2

x1*

x2*

(x1*,x2*) is interior .(b) The slope of the indiff.

#ur$e at (x1*,x2*) e%uals

the slope of the budget #onstraint.

Appendix 5A



-ndierence Curves or a !air o

/oods

Figure 5A-1

Appendix 5A



A Family o -ndierence Curves

Figure 5A-2

Appendix 5A



-ncome Constrains Consumer

.pendin%

Figure 5A-3

Appendix 5A

Fi 5A 4



Consumer0s ost !reerred andFeasi)le Consumption Bundle -s

Attained at B

Figure 5A-4

Appendix 5A

Fi 5A 5



Eect o -ncome Chan%e on

E*uili)rium

Figure 5A-5

Appendix 5A

Fi 5A 6



Eect o !rice Chan%e on

E*uili)rium

Figure 5A-6

Demand & Consumer Behavior - Chapter 5

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