Professional Documents
Culture Documents
Overview
I. Consumer Behavior
Indifference Curve Analysis Consumer Preference Ordering
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II. Constraints
The Budget Constraint Changes in Income Changes in Prices
III. Consumer Equilibrium IV. Indifference Curve Analysis & Demand Curves
Individual Demand Market Demand
Consumer Behavior
Consumer Opportunities
The possible goods and services consumer can afford to
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consume.
Consumer Preferences
The goods and services consumers actually consume.
either
Prefers bundle A to bundle B: A B. Prefers bundle B to bundle A: A B.
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Good X
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Complete Preferences
Completeness Property
Consumer is capable of expressing
preferences (or indifference) between all possible bundles. (I dont 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.
Good X
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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 on ICII are preferred to ICI.
33.33
Good X
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give up to maintain the same satisfaction level decreases as more of good X is acquired. The rate at which a consumer is willing to substitute one good for another and maintain the same satisfaction level.
consumer must give up 50 units of Y to get 100 one additional unit of X. To go from consumption bundle B to C the consumer must give up 16.67 units of Y to 50 get one additional unit of X. To go from consumption bundle C to D 33.33 the consumer must give up only 8.33 units 25 of Y to get one additional unit of X.
B C D
Good X
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transitivity property implies that if C B and B A, then C A. Transitive preferences along with the more-is-better property imply that indifference curves will not 100 intersect. 75 the consumer will not get caught in a 50 perpetual cycle of indecision.
7 Good X
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Budget Line
M/PY
Y = M/PY (PX/PY)X
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Changes in Income
Increases lead to a parallel,
M1/PY
outward shift in the budget line (M1 > M0). Decreases lead to a parallel, downward shift (M2 < M0).
M0/PY
M2/PY
Changes in Price
A decreases in the price of good X
Y
M0/PY
M2/PX
M0/PX
M1/PX
rotates the budget line counterclockwise (PX0 > PX1). An increases rotates the budget line clockwise (not shown).
M0/PX0
M0/PX1
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Consumer Equilibrium
The equilibrium
Y
M/PY
consumption bundle is the affordable bundle that yields the highest level of satisfaction.
Consumer equilibrium occurs at
Consumer Equilibrium
a point where MRS = PX / PY. Equivalently, the slope of the indifference curve equals the budget line.
III.
II.
I.
M/PX
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Complementary Goods
An increase (decrease) in the price of good X leads to a decrease
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Complementary Goods
When the price of Pretzels (Y) good X falls and the consumption of Y rises, then X and Y M/PY 1 are complementary goods. (PX1 > PX2)
Y2 Y1
B A I 0
X1 M/PX1 X2 M/PX2
II
Beer (X)
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Normal Goods
An increase in income increases the consumption of normal goods.
(M0 < M1).
B
Y1 M0/Y
Y
M1/Y
Y0
A I 0
X0 M0/X
X1 M1/X
II
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C A B II
I
IE SE
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An individuals demand
curve is derived from each new equilibrium point found on the indifference curve as the price of good X is varied.
II I $ X
P0 P1 X0 X1 D
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Market Demand
The market demand curve is the horizontal summation of
individual demand curves. It indicates the total quantity all consumers would purchase at each price point.
$ 50
40
D1 1 2
D2 Q 1 2 3
DM Q
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Conclusion
Indifference curve properties reveal information about
individuals demand curves. Market demand is the horizontal summation of individuals demands.