Consumer Behavior

1
Consumer Behavior

• How People Choose

2
Preferences Origin

• Where they come from
• The economist is not concerned with ends as
  such. He is concerned with the way in which the
  attainment of ends is limited. The ends may be
  noble or they may be base. They may be material
  or immaterial if ends can be so described. But
  if the attainment of one set of ends involves the
  sacrifice of others, then it has an economic
  aspect (Robbins, 1932, p. 25).
• Consumer is faced to choices
• between one good or another
• how much of two goods
• Decisions are made from an individuals ordering
  observed as one structure of preferences

3
Preferences Assumptions
Clothing

• Baskets A, B, C,
• Completeness
• A ? B
• B ? A
• A ?? B
• Reflexivity
• If A ? B then B ? A
• More is better than less
• Example B ? H
• Transitivity
• If A ? B and B ? C then A ? C
• Example E ? A and A ? G then E ? G
• Continuity
• If A ? B, Then there exists a C such that A ? C

50
40
30
20
10
10
20
30
40
Food
4
Structure of Preferences and Indifference Curves
Clothing

• Indifference Curves
• The same level of satisfaction

50
40
30
20
10
Food
10
20
30
40
5
PreferencesIndifference Curves and Indifference
Maps
6
Preferences The Marginal Rate of Substitution
Clothing
10
U U(C,F)
U
U
U


8
6
The total variation of U at (4,3)
is
4
the variation with respect to C
of U
plus
2
the variation with respect to F
Food
2
4
6
8
7
Preferences The Marginal Rate of Substitution
Clothing
U 0
10
0
8
MRSC
The Marginal Rate of Substitution of C
6
is the quantity of clothes the actor is willing
to give up for one unit of food
4
MRSC(4,3) -2
2
MRSF(4,3) -½
Food
2
4
6
8
8
Preferences The Marginal Rate of Substitution
Clothing
10
MRSC(4,3) -2
MRSF(4,3) -½
8
6
4
U(4,3)
2
Food
2
4
6
8
9
Preferences (Substitutes)

• Substitutes

MRSY -1
MRSY - ½
10
Preferences (Substitutes)

• Complements

11
Budget
How can be used the budget to acquire goods?

• Example
• The market price per unit of clothes is Pc 2
• The market price per unit of food is Pf 1
• How many units of clothes or food can be acquired
  with a Budget of 10?

Consider the extremes
10 PcXC 2XC
10 PfXf 1Xf
10 2XC
10 1Xf
Xf 10
XC 5
12
Budget Line

• y ax b

slope
10 2 Xc 1 Xf
10 2Xc Xf
pc
Xc

pf Xf
B
pf
B
Xc

-
Xf
pc
pc
pf
Slope
pc
Cross with the vertical axis
B
pc
13
Budget Line and Changes on Prices

• Let consider the price of clothes decreased to Pc
  1,25

10 PcXC 1,25XC
10 1,25XC
XC 8
10 2Xc Xf
14
Consumer Choice
How does she choose?
U U(Xc,Xf)
Xc
10
10 2Xc Xf
8
She spends all her budget (No savings)
? The choice has to be on the line
6
She tries to maximize her satisfaction
4
? The choice has to reach the highest possible
level of satisfaction
2
Xf
2
4
6
8
10
15
Consumer Choice
How does she choose?
U U(Xc,Xf)
10 2Xc Xf
She spends all her budget (No savings)
? The choice has to be on the line
B
16
Consumer Choice
How does she choose?
U U(Xc,Xf)
10 2Xc Xf
She tries to maximize her satisfaction
? The choice has to reach the highest possible
level of satisfaction
B
C
17
Consumer Choice
How does she choose?
U U(Xc,Xf)
Xc
10
B pcXc pfXf
8
Graphically, the solution takes place where the
line touches tangentially the indifference curve.
6
The solution takes place where the slope of the
line equals the tangent of the utility function
4
2
Mathematically
Xf
2
4
6
8
10
18
Corner Solutions
Clothing
10
8
6
4
2
Food
2
4
6
8
19
Marginal Utility and Choice
The Marginal Utility measures the additional
satisfaction obtained from consuming one
additional unit of a good.
The Marginal Utility is decreasing as the
consumption grows more and more, the additional
satisfaction obtained is less and less
U(food)
Food