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The Theory of
Individual Behavior
Consumer Behavior
Assume
Assume
a consumer is able to
order his or her preferences for
alternative bundles or
combinations of goods from best
to worst.
2
Consumer Behavior
A
>B
the consumer prefers bundle A to
bundle B.
B
the consumers view the two
bundles as equally satisfying. He
or she indifferent between
bundles A and B.
3
Consumer Behavior
The
preference ordering is
assumed to satisfy four basic
properties:
1. Completeness.
2. More is better.
3. Diminishing marginal rate of
substitution.
4. Transitivity.
4
Consumer Behavior
Completeness:
Consumer Behavior
More
is better:
- for any two bundles, say A and
B,
either A > B, B > A, A B.
Figure 4-1 Page 120.
Consumer Behavior
Diminishing
marginal rate of
substitution:
- As a consumer obtains more of
good
X, the rate at which he or she is
willing to substitute good X for
good
Y decreases.
7
Consumer Behavior
Transitivity:
set:
The bundles of goods a
consumer can
afford.
Px X + Py Y equals or less M
The budget set.
9
line:
The bundles of goods that
exhaust a
consumers income.
Px X + Py Y = M
The budget line.
10
Changes In Income
Changes
in income shrink or
expand opportunities.
Figure 4-5 Page 126.
11
Changes In Prices
Figure
12
Consumer Equilibrium
The
Consumer
equilibrium:
The affordable bundle that yields the
greatest satisfaction to the consumer.
Figure 4-8 Page 128.
13
Consumer Equilibrium
Consumer
equilibrium:
MRS = (Px / Py)
MRS = marginal rate of
substitution
Px = price of good X
Py = price of good Y
14
Comparative Statics
Comparative Statics
16
Comparative Statics
Conceptual and
Computational Questions
1.
18
Conceptual and
Computational Questions
2.
Conceptual and
Computational Questions
3.