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Fernando & YvonnQuijano

Prepared by:

Consumer

Behavior

3

CHA

P

TE

R

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Chapter3:Consum

erBehavior

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CHAPTER 3 OT!"#E

(.) Consu#er Pre&erences

(.2 *udget Constraints

(.( Consu#er Choice

(.+ Reeaed Pre&erence

(.- "argina tiity and Consu#er Choice

(./ Costo&1iing Indees

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erBehavior


Consu#er *ehaior

theory of $onsumer behavior 3escription o& ho4consu#ers aocate inco#es a#ong di&&erent goods andserices to #ai#i5e their 4ebeing.

Consu#er behaior is best understood in three distinct steps6

). Consu#er pre&erences

2. *udget constraints

(. Consu#er choices

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C78"ER PRE:ERE8CE(.)

&ar'et Bas'ets

mar'et bas'et ;orbund(e

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.ome Basi$ Assumptions about Preferen$es

*) Comp(eteness: Pre&erences are assu#ed to be complete. Inother 4ords, consu#ers can co#pare and ran$ a possibebas$ets. Thus, &or any t4o #ar$et bas$etsA and B, a consu#er4i pre&erA to B, 4i pre&er B toA, or 4i be indi&&erent bet4een

the t4o. *y indifferent 4e #ean that a person 4i be e=uaysatis&ied 4ith either bas$et.

8ote that these pre&erences ignore costs. A consu#er #ightpre&er stea$ to ha#burger but buy ha#burger because it ischeaper.

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.ome Basi$ Assumptions about Preferen$es

2) Transitivity: Pre&erences are transitive. Transitiity #eans thati& a consu#er pre&ers bas$etA to bas$et B and bas$et B tobas$et C, then the consu#er aso pre&ersA to C. Transitiity isnor#ay regarded as necessary &or consu#er consistency.

3) &ore is better than (ess: >oods are assu#ed to be desirabe?i.e., to be good. Conse=uenty, consumers always prefermore of any good to less. In addition, consu#ers are neersatis&ied or satiated@ more is always better, even if just a littlebetter. This assu#ption is #ade &or pedagogic reasons@na#ey, it si#pi&ies the graphica anaysis. 7& course, so#egoods, such as air poution, #ay be undesirabe, andconsu#ers 4i a4ays pre&er ess. e ignore these Bbads inthe contet o& our i##ediate discussion.

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0es$ribin, "ndividua( Preferen$es

*ecause #ore o& each good ispre&erred to ess, 4e can

co#pare #ar$et bas$ets in theshaded areas. *as$etAis cearypre&erred to bas$et G, 4hie Eisceary pre&erred toA.

Ho4eer,Acannot be co#pared4ith B, D, or H4ithout additionain&or#ation.


+i,ure 3)*

"ndifferen$e Curves

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The indi&&erence cure )that

passes through #ar$et bas$etAsho4s a bas$ets that giethe consu#er the sa#e ee o&satis&action as does #ar$etbas$etA@ these incudebas$ets Band D.

An "ndifferen$e Curve


+i,ure 3)2

"ndifferen$e Curves

indifferen$e $urve Cure representing a co#binations o& #ar$etbas$ets that proide a consu#er 4ith the sa#e ee o& satis&action.

7ur consu#er pre&ers bas$etE, 4hich ies aboe ), toA,

but pre&ersAto Hor G, 4hichie beo4 ).

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An indi&&erence #ap is a set o&

indi&&erence cures thatdescribes a personDspre&erences.

An "ndifferen$e &ap


+i,ure 3)3

"ndifferen$e &aps

indifferen$e map >raph containing a set o& indi&&erence curessho4ing the #ar$et bas$ets a#ong 4hich a consu#er is indi&&erent.

Any #ar$et bas$et onindi&&erence cure (, such as

bas$etA, is pre&erred to anybas$et on cure 2;e.g.,

bas$et B

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I& indi&&erence cures )and 2

intersect, one o& the

assu#ptions o& consu#ertheory is ioated.

"ndifferen$e Curves Cannot "nterse$t


+i,ure 3)%

"ndifferen$e &aps

According to this diagra#, theconsu#er shoud be indi&&erenta#ong #ar$et bas$etsA, B,and D. et Bshoud bepre&erred to Dbecause Bhas#ore o& both goods.

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The #agnitude o& the sope o& an

indi&&erence cure #easures theconsu#erFs #argina rate o&substitution ;"R< bet4een t4ogoods.

The &ar,ina( Rate of .ubstitution


+i,ure 3)-

The &ar,ina( Rate of .ubstitution

In this &igure, the "R bet4een cothing;C< and &ood ;!< &as &ro# / ;bet4eenAand B< to + ;bet4een Band D< to 2;bet4een Dand E< to ) ;bet4een Eand

G

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Perfe$t .ubstitutes and Perfe$t Comp(ements

perfe$t substitutes T4o goods &or 4hich the #argina rateo& substitution o& one &or the other is a constant.

perfe$t $omp(ements T4o goods &or 4hich the "R is5ero or in&inite@ the indi&&erence cures are shaped as rightanges.

bad >ood &or 4hich ess is pre&erred rather than #ore.

Bads

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In 6a8*ob ie4s orange Guice andappe Guice as per&ect substitutes6He is a4ays indi&&erent bet4een agass o& one and a gass o& theother.



+i,ure 3)/


In 6b, ane ie4s e&t shoes andright shoes as per&ect co#pe#ents6

An additiona e&t shoe gies her noetra satis&action uness she aso

obtains the #atching right shoe.

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Chapter3:Consum

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Pre&erences &or auto#obie attributes can be described byindi&&erence cures. Each cure sho4s the co#bination o&acceeration and interior space that gie the sa#esatis&action.

Preferen$es for Automobi(e Attributes


74ners o& :ord "ustang coupes 6aare4iing to gie up considerabe interiorspace &or additiona acceeration.

+i,ure 3)7

The opposite is true &or o4ners o&:ord Eporers 6b. They pre&erinterior space to acceeration.

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A utiity &unction can berepresented by a set o&indi&&erence cures, each4ith a nu#ericaindicator.

This &igure sho4s threeindi&&erence cures ;4ithutiity ees o& 2-, -0,and )00, respectieyET C78TRAI8T(.2

The tabe sho4s #ar$et bas$ets associated 4ith the budget ine

! 2CJ KL0

The Bud,et !ine

bud,et $onstraints Constraints that consu#ers &aceas a resut o& i#ited inco#es.

bud,et (ine A co#binations o& goods &or 4hich the totaa#ount o& #oney spent is e=ua to inco#e.

TAB!E 3)2 &ar'et Bas'ets and the Bud,et !ine

A 0 +0 KL0

B 20 (0 KL0

D +0 20 KL0

E /0 )0 KL0

G L0 0 KL0

&ar'et Bas'et +ood 6F Tota( .pendin,

F CP F P C I+ = 63)*

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*3>ET C78TRAI8T(.2

A budget ine describes theco#binations o& goods that can bepurchased gien the consu#erFsinco#e and the prices o& the goods.

1ineAG;4hich passes throughpoints B, D, and E< sho4s thebudget associated 4ith an inco#eo& KL0, a price o& &ood o& "!J K)

per unit, and a price o& cothing o&"CJ K2 per unit.

The sope o& the budget ine

;#easured bet4een points Band DI8A1 TI1IT A83 C78"ER CH7ICE(.-

mar,ina( uti(ity 6& Additiona satis&action obtained

&ro# consu#ing one additiona unit o& a good. diminishin, mar,ina( uti(ity Principe that as #ore o& a good is

consu#ed, the consu#ption o& additiona a#ounts 4i yieds#aer additions to utiity.

( / ) MU /MUC FF C

=

0 MU ( ) MU ( )F CF C

= +

MRS MU /MUF C

=

MRS /P PF C

=

MU / MU /P PF FC C

=

MU / MU /P PF F C C

=

e;ua( mar,ina( prin$ip(e Principe that utiity is #ai#i5ed4hen the consu#er has e=uai5ed the #argina utiity per doar o&ependiture across a goods.

63)-

63)/

63)7

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Chapter3:ConsumerBehavior


&ar,ina( ti(ity and Happiness

"AR>I8A1 TI1IT A83 C78"ER CH7ICE(.-

A co#parison o& #ean ees o& satis&action 4ith i&e across inco#e casses in thenited tates sho4s that happiness increases 4ith inco#e, but at a di#inishingrate.

+i,ure 3)24

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"neffi$ien$y of

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Comparin,

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C7T7:1II8> I83EQE(./

"dea( Cost=of=!ivin, "nde5

$ost=of=(ivin, inde5 Ratio o& the present cost o& atypica bunde o& consu#er goods and serices co#pared4ith the cost during a base period.

idea( $ost=of=(ivin, inde5 Cost o& attaining a gienee o& utiity at current prices reatie to the cost o&attaining the sa#e utiity at baseyear prices.

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The initia budget constraint&acing arah in )99- is gien byine l)@ her utiity#ai#i5ing

co#bination o& &ood and boo$sis at pointAon indi&&erencecure ).

Rache re=uires a budgetsu&&icient to purchase the &oodboo$ consu#ption bunde gienby point Bon ine l2;and

tangent to indi&&erence cure

)

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A price inde, 4hich representsthe cost o& buying bundeAatcurrent prices reatie to thecost o& bundeAat baseyearprices, oerstates the ideacosto&iing inde.

"dea( Cost=of=!ivin, "nde5

TAB!E 3)3 "dea( Cost=of=!ivin, "nde5

Price o& boo$s K20%boo$ K)00%boo$

8u#ber o& boo$s )- /

Price o& &ood K2.00%b. K2.20%b.

Pounds o& &ood )00 (00

Ependiture K-00 K)2/0

244- 6Rachel*- 6Sarah

Cost=of=!ivin, "nde5es

+i,ure 3)23

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!aspeyres "nde5

!aspeyres pri$e inde5 A#ount o& #oney at current yearprices that an indiidua re=uires to purchase a bunde o& goodsand serices chosen in a base year diided by the cost o&purchasing the sa#e bunde at baseyear prices.

Paas$he inde5 A#ount o& #oney at currentyear prices thatan indiidua re=uires to purchase a current bunde o& goods andserices diided by the cost o& purchasing the sa#e bunde in abase year.

Comparin, "dea( Cost=of=!ivin, and !aspeyres "nde5esThe 1aspeyres inde oerco#pensates Rache &or the highercost o& iing, and the 1aspeyres costo&iing inde is, there&ore,

greater than the idea costo&iing inde.

Comparin, the !aspeyres and Paas$he "nde5es ust as the1aspeyres inde 4i oerstate the idea cost o& iing, thePaasche 4i understate it because it assu#es that the indiidua4i buy the currentyear bunde in the base period.

Paas$he "nde5

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fi5ed=ei,ht inde5 Costo&iing inde in 4hich the

=uantities o& goods and serices re#ain unchanged.

$hain=ei,hted pri$e inde5 Costo&iing inde thataccounts &or changes in =uantities o& goods and serices.

Pri$e "nde5es in the nited .tates: Chain >ei,htin,

A co##ission chaired by tan&ord niersity pro&essor "ichae*os$in concuded that the CPI oerstated in&ation byapproi#atey ).) percentage points?a signi&icant a#ount gienthe reatiey o4 rate o& in&ation in the nited tates in recentyears.

Approi#atey 0.+ percentage points o& the ).)percentagepointbias 4as due to the &aiure o& the 1aspeyres price inde to account&or changes in the current year #i o& consu#ption o& theproducts in the baseyear bunde.

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