Consumer Choice

Chapter 3
 Consumer Choice
 How do we decide how much of any good to
buy?

 Why do we feel so good about our purchases?

 Why do we buy certain products but not others?

 Consumer Behavior
Consumer Preference

Budget Constraints

Consumer Choices
 Socio Psychiatric Explanation
 Psychiatrists
 Psychologists
 Sociologists
 Freudian Approach – Id, ego and superego
drives and motivates us to buy, buy and
buy
 Sociologiststalks about consumption
related to recognition
 Consumer Preference
Three Basic Assumptions of Consumer Preference

 Completeness

 Transitivity

 More is better than less

 Utility or Preference
 Cardinal Utility- Numerical representation
of utility

 Ordinal Utility- Refers to ranking of

baskets

 Ordinal
utility is the preferred way of
representation
 Indifference Curve
 Use to map the utility
 Provides all combination of market baskets that provide
a consumer with the same level of satisfaction
Properties of Indifference Curve

 Convex to Origin
 ICs cannot intersect
 Marginal rate of Substitution
 Diminishing Marginal Rate of substitution

 Diminishing Marginal Utility

Marginal rate of Substitution
Perfect Substitutes and Perfect Compliments
 MRS for perfect substitutes is constant
 For complements ICs are L shaped
 Budget Constraints
 Budget Constraints – related to income
 Budget line- shows the combination of food and
clothing for which the total amount is spent
Pf F+ Pc C= M – Budget Constraint
C= M/Pc- (Pf/Pc)F
Vertical Intercept- M/Pc
 Slope - (Pf/Pc)
Budget Line
Change in Price
Change in Income
 Consumer Choice
 It must be located on the budget line
 Must give the preferred combination of goods and
services
Corner Solution
 Price Consumption Curve
 The price-consumption curve (PCC) indicates the
various amounts of a commodity bought by a consumer
when its price changes