tailieunhanh - Lecture Managerial economics: Chapter 5 - Dr. Hasnain Naqvi

This chapter provides knowledge of the theory of individual behavior. The contents of this chapter include all of the following: Consumer behavior, indifference curve analysis, consumer preference ordering, constraints, the budget constraint, changes in income, changes in prices, consumer equilibrium, indifference curve analysis & demand curves, individual demand, market demand. | The Theory of Individual Behavior Overview I. Consumer Behavior Indifference Curve Analysis Consumer Preference Ordering II. Constraints The Budget Constraint Changes in Income Changes in Prices III. Consumer Equilibrium IV. Indifference Curve Analysis & Demand Curves Individual Demand Market Demand 4- Consumer Behavior Consumer Opportunities The possible goods and services consumer can afford to consume. Consumer Preferences The goods and services consumers actually consume. Given the choice between 2 bundles of goods a consumer either Prefers bundle A to bundle B: A B. Prefers bundle B to bundle A: A B. Is indifferent between the two: A B. 4- Indifference Curve Analysis Indifference Curve A curve that defines the combinations of 2 or more goods that give a consumer the same level of satisfaction. Marginal Rate of Substitution The rate at which a consumer is willing to substitute one good for another and maintain the same satisfaction level. I. II. III. Good Y . | The Theory of Individual Behavior Overview I. Consumer Behavior Indifference Curve Analysis Consumer Preference Ordering II. Constraints The Budget Constraint Changes in Income Changes in Prices III. Consumer Equilibrium IV. Indifference Curve Analysis & Demand Curves Individual Demand Market Demand 4- Consumer Behavior Consumer Opportunities The possible goods and services consumer can afford to consume. Consumer Preferences The goods and services consumers actually consume. Given the choice between 2 bundles of goods a consumer either Prefers bundle A to bundle B: A B. Prefers bundle B to bundle A: A B. Is indifferent between the two: A B. 4- Indifference Curve Analysis Indifference Curve A curve that defines the combinations of 2 or more goods that give a consumer the same level of satisfaction. Marginal Rate of Substitution The rate at which a consumer is willing to substitute one good for another and maintain the same satisfaction level. I. II. III. Good Y Good X 4- Consumer Preference Ordering Properties Completeness More is Better Diminishing Marginal Rate of Substitution Transitivity 4- Complete Preferences Completeness Property Consumer is capable of expressing preferences (or indifference) between all possible bundles. (“I don’t know” is NOT an option!) If the only bundles available to a consumer are A, B, and C, then the consumer is indifferent between A and C (they are on the same indifference curve). will prefer B to A. will prefer B to C. I. II. III. Good Y Good X A C B 4- More Is Better! More Is Better Property Bundles that have at least as much of every good and more of some good are preferred to other bundles. Bundle B is preferred to A since B contains at least as much of good Y and strictly more of good X. Bundle B is also preferred to C since B contains at least as much of good X and strictly more of good Y. More generally, all bundles on ICIII are preferred to bundles on ICII or ICI. And all bundles