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Microeconomics II

CONSUMER BEHAVIOUR (Person International Edition: Microeconomics , Chapter 3, Pindyck & Rubinfeld) . Microeconomics II. Theresa Paintner Michaela Scholler. S. P 0 : the offered amount Q S equals the demanded amount Q D Q S =Q D = Q o (Market clearing ). P 0. P 2. D- surplus.

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Microeconomics II

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  1. CONSUMER BEHAVIOUR (Person International Edition: Microeconomics, Chapter 3, Pindyck & Rubinfeld) Microeconomics II Theresa Paintner Michaela Scholler

  2. S P0 : theofferedamountQS equalsthedemandedamountQD QS=QD=Qo (Market clearing) P0 P2 D-surplus D QS2 Q0 QD2 Demand andSupply; Market mechanismandmarketequilibrium Price S-surplus P1 : surplusof QS1-QD1 P1 P2: not enoughoffer- equalsQD2-QS2 QS1 QD1 Quantity

  3. D D’ S S’ P2 P1 Q1 Q2 Changes in themarketequilibrium P • Example: • incomeincreases (D‘) • commoditypricesdecrease (S‘) • equilibriumpriceincreasesfromP1toP2 • (Is thisalwayslikethat?) • equilibriumquantityincreasesfromQ1toQ2 Q

  4. 3 stepsofconsumerbehaviour • consumerpreferences • Howandwhyis a goodpreferredcomparedtoothers? • complete (consumers can compare all possible market baskets) • transitive (if they prefer basket A to B, and B to C, then the prefer A to C) • Assumptionthatmore of each good is always preferred to less • budget line • constraints consumer choices • Maximizingthesatisfaction • In considerationof • Preferences • Budget line

  5. U3 U2 consumer‘spreferences • IndifferenceCurve (Ui) • Combinationofgoodswiththe same benefit/utility(indifference) Basket D ispreferedto C. Basket C ispreferedto A and B. Basket A andB havethe same utitlity. clothes B C D A U1 food

  6. A B D E G Marginal rate ofsubstitution(MRS) = rate at which a consumer is ready to give up one good in exchange for another good while maintaining the same level of utility. At consumption levels, our marginal rates of substitution are identical. clothes 16 14 -6 12 10 law of diminishing marginal rate of substitution: As one moves down a (standardly convex) indifference curve, the marginal rate of substitution decreases. 1 8 -4 6 1 -2 4 1 -1 1 2 food 1 2 3 4 5

  7. L3 L1 L2 (PF = 1) L2 (PF = 1/2) L1 (I = €160) (PF = 2) (I = €80) Budget constraint clothes clothes = represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income. PF*F+PC*C=I 80 Changesofpricesofgoods changesofincome 60 50 40 20 food food 40 80 120 160 0 40 80 120 160

  8. Pc= €2 Pf = €1 I = €80 C budget line U3 U2 Decisionsofconsumers • maximationofutilitywithinbudgetconstraint • maximumis on thebudgetline • Optimum: MRS=slopeofbugetline clothes 40 B 30 -10C A 20 +10F U1 0 20 40 80 food

  9. Marginal utility • = the gain from an increase or loss from a decrease in the consumption of that good or service • law of diminishing marginal utility= the first unit of consumption of a good or service yields more utility than the second and subsequent units, with a continuing reduction for greater amounts • all points on indifferencecurves • marginal decision rule = states that a good or service should be consumed at a quantity at which the marginal utility is equal to the marginal cost

  10. Consumer choice Consumer Choice The maximizingmarketbasket must satisfytwoconditions: Must belocatedon theline Must begivetheconsumerthemostpreferredcominationofgoodsandservices.

  11. Consumer choice

  12. Revealed Preference • Ifweknowthechoices a customerhasmade, wecandeterminewhat her preferencesareifwehaveinformationaboutsufficientnumberofchoicesthearemadewhenpricesandincomesvary.

  13. RevealedPreferences • I1: Choose A over B – A isrevealedpreferedto B • I2: Choose B over D – B isrevealedtopreferredto D

  14. Costoflivingindex Costoflivingindex Ratio ofthepresentcostof a typicalbundleofconsumergoodsandservicescomparedwiththecostduringbaseperiod. Ideal cost-livingindex Costofattaining a givenlevelofutility at currentprices relative tothecostofattendingthe same utility at baseyearprices

  15. Costoflivingindex

  16. Costoflivingindex • Sarah: 100 x 2 + 15 x 20 = 500 Dollar • Rachel: 300 x 2,20 + 6 x 100 = 1260 Dollar • The ideal cost-livingadjustmentfor Rachel is 760 Dollars • The ideal costlivingindex 1260/500 = 2,52

  17. Thankyouverymuch!

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