Consumer Behavior, Utility Maximization, Indifference Curves

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Consumer Behavior, Utility Maximization,
Indifference Curves
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Income Effect

• Impact ? price of product has on real
  income/purchasing power (real vs. nominal) and
  therefore on quantity demanded
• Inflation/deflation
• Objective measure true regardless of changes in
  other goods

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Substitution Effect

• Impact ? price product on relative expensiveness
  and therefore QD
• Subjective measure inoperative if everything
  else gets more expensive too

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Law of Diminishing Marginal Utility

• Utility want-satisfying power
• 1) not usefulness 2) subjective 3) but
  quantifiable utils
• Total utility vs. marginal utility
• Helps explain demand curve (have to cut prices to
  sell more as MU diminishes) and elasticity (how
  quickly MU diminishes fast inelastic, slower
  elastic)

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Theory of Consumer Behavior

• 1) Rational maximize total utility
• 2) Preferences good idea of marginal utility
• 3) Budget restraint finite resources therefore
  income
• 4) Prices product prices not affected by amount
  individual buys (unlike Bootie Beer stocks)

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Utility-Maximizing Rule

• The consumer should allocate his/her money
  income so that the last dollar spent on each
  product yields the same amount of marginal
  utility? balance the margins? equilibrium,
  ceteris paribus

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A price 1B price 2 Income 10
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Algebra

• MU A/A MUB/B

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Indifference Curves

• Budget line a schedule or curve that shows
  various combinations of two products a consumer
  can purchase with a specific money income
• Income ?? ? curve (up? right down? left)
• Price ? if both ?? shift if one? slope ?

Unattainable
Attainable (inefficient)
Attainable (efficient)
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Indifference Curve

• IC Shows all combinations of two products A and
  B which will yield the same total
  satisfaction/utility to a consumer
• Gets same utility from any combination, so
  indifferent to which combination
• Downsloping more of one means less of the other
• Convex to origin diminishing slope as move down?
  marginal rate of substitution willingness to
  substitute B for A diminishes as move down curve
  as amount of B increase, MU of B decreases while
  as quantity A decreases MU of A increases (and
  vice versa)

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Indifference Map
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Perfect Substitutes
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Perfect Complements (lr shoes)
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Equilibrium position intersection budget line
and highest indifference curve
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Difference Marginal Utility Theory and
Indifference Curve Theory

• MUT requires consumer knows MU
• ICT requires only that knows that different
  combination generates more or less satisfaction
  but not how much more/less
• Nevertheless, at equilibrium Pb/Pa MUb/MUa so
  both give same result

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Deriving a Demand Curve from the Indifference
Curve