Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
This is a PowerPoint presentation on consumer behavior and demand. A left mouse click or the enter key will add and element to a slide or move you to the next slide. The back space key will take you back an element or slide. If you wish to exit the presentation, the escape key will do it! R. Larry Reynolds 1997 Consumer Objectives · In the Neoclassical economics, the goal of consumer behavior is utility maximization [this is consistent with maximization of Net benefits] · Consumer choice among various alternatives is subject to constraints: · income or budget · prices of goods purchased · preferences Fall ‘ 97 Principles of Microeconomics Slide -- 2 Models of Consumer Behavior · Marginal Utility approach · cardinal measure of utility · problem of related goods · Indifference approach · ordinal utility · related goods · observable behavior Fall ‘ 97 Principles of Microeconomics Slide -- 3 Utility Approach to Consumer Behavior · Need for cardinal measure of utility · analysis is useful for explaining behavior · Total and Marginal utility · “law of diminishing Marginal Utility” · Equimarginal rule and utility maximization Fall ‘ 97 Principles of Microeconomics Slide -- 4 Total utility [TU] is defined as the amount of utility an individual derives from consuming a given quantity of a good during a specific period of time. TU = f(Q, preferences, . . .) Utility TU Q TU 120 100 2 30 55 75 60 1 3 4 5 6 90 7 100 105 105 8 100 Fall ‘ 97 80 40 20 . 1 . 2 Principles of Microeconomics . 3 . . . . . TU 4 5 6 7 Q/ut Slide -- 5 Nature of Total Utility · When more and more units of a good are consumed in a specific time period, the utility derived tends to increase at a decreasing rate · Eventually, some maximum utility is derived and additional units cause total utility to diminish. As an example, think of eating “free” hot cakes. · It is possible for total utility to initially increase at an increasing rate. Fall ‘ 97 Principles of Microeconomics Slide -- 6 Marginal Utility · Marginal utility [MU] is the change in total utility associated with a 1 unit change in consumption. · As total utility increases at a decreasing rate, MU declines. · As total utility declines, MU is negative · When TU is a maximum, MU is 0 [This is sometimes called the “Satiation point” or the point of “absolute diminishing utility.” Fall ‘ 97 Principles of Microeconomics Slide -- 7 Marginal Utility [MU] is the change in total utility [DTU] caused by a one unit change in quantity [DQ] ; MU = DTU DQ Utility DQ=1 DQ=1 DQ=1 Fall ‘ 97 Q TU MU 1 2 3 4 5 6 7 8 30 55 DTU=25 75 20 90 100 105 105 100 DTU=30 30 25 DTU=20 15 10 5 0 -5 The first unit consumed increases TU by 30. MU The 2cd unit increases TU by 25. 30 25 20 .. 10 .. 1DQ2 3 4 .. . MU 5 6 7 . Q/ut Remember that the MU is associated with the midpoint between the units as each additional unit is added. Principles of Microeconomics Slide -- 8 TU The first unit consumed, DQ 120 increases TU by 30, DTU. 100 max TU 80 60 . DQ 40 20 20 . . . . . [Using calculus, MU is the change in TU as change in quantity approaches 0.] between the 2cd and 3rd units DTU = 20 or the slope of TU is 20. For the first unit: DTU MU 30 . . The MU is the slope of TU or the TU rate of change in TU associated with a one unit change in quantity. 1 2 .. 10 1 Fall ‘ 97 2 3 4 .. 3 4 5 6 7 Q/ut . .MU .. 5 6 7 30 DTU MU = = DQ 1 DTU The slope of TU is = 30, DQ MU is the slope of the TU. The second unit changes TU [ DTU] by 25, The slope of TU between the 1 and second unit is 25. Where MU = 0, TU is a maximum. Q/ut Principles of Microeconomics Slide -- 9 Consumer Preferences · · · · Both MU and TU are determined by the “preferences” or utility function of the individual and the quantity consumed. Utility cannot be measured directly but individual choices reveal information about the individual’s preferences Surrogate variables [age, gender, ethnic background, religion, etc.] may be correlated with preferences. There is a tendency for TU to increase at a decreasing rate [MU declines] as more of a good is consumed in a given time period: i.e. “diminishing marginal utility” Fall ‘ 97 Principles of Microeconomics Slide -- 10 Diminishing Marginal Utility · Initially, it may be possible for TU to increase at an increasing rate. In which case MU will increase [MU is the slope of TU which is increasing]. · Eventually, as more and more of a good are consumed in a given time period, TU continues to increase but at a decreasing rate; MU decreases. · This is called the point of “diminishing marginal utility.” Fall ‘ 97 Principles of Microeconomics Slide -- 11 Consumer Choices · If there were no costs associated with choices, the individual will consume a good until MU = 0 [this maximizes TU or the total benefits, TB] · Typically, individuals are constrained by a budget [or income] and the prices they pay for the goods they consume. · Net benefits are maximized where MB = MC; as long as the MU or MB of the next unit of good purchased exceeds the Price or MC, it will increase net benefits Fall ‘ 97 Principles of Microeconomics Slide -- 12 Society and Individual · The individual will purchase more of a good so long as their perceived or anticipated MB exceeds the price they must pay for the good: Buy so long as MB > P, optimum where, P = MB · From a social perspective that good should only be produced and sold if the price is greater than or equal to the MC: Sell so long as P > MC, optimum where P = MC · Social optimum when MB = P = MC Fall ‘ 97 Principles of Microeconomics Slide -- 13 Constrained Optimization · Individual choices then become a function of the price of the good, income [budget], prices of related goods and preferences. · QX = f (PX , Y, PY, Preferences, . . . ) · · · · Where: PX = price of good X Y = income PY = prices of related goods · “preferences” is the individual’s utility function Fall ‘ 97 Principles of Microeconomics Slide -- 14 Utility and Demand · Individual choice is influenced by: · QX = f (PX , Y, PY, Preferences, . . . ) · These are the same variables in the demand function · The forces that shape the demand function can be analyzed with utility analysis Fall ‘ 97 Principles of Microeconomics Slide -- 15 B > PxQx + PyQy The budget constraint can be expressed: The amount of good Y that can be purchased is the budget divided by the price of good Y, The amount of good X that can be purchased is, B Px Qy B 80 = 16 = Py 5 Connecting the two intercepts identifies all combinations of goods X &Y that can be purchased for a budget of $80, Py = $5, and PX = $3. 0 Fall ‘ 97 B Py For an B = $80, and Py = $5 For an B = $80, and PX = $3 C Any combination inside area 0AC can be purchased for less than $80. B 80 = 26.7 = Px 3 Principles of Microeconomics A Qx Slide -- 16 Consider an individual’s utility preference for 2 goods, X & Y; Good X Utility X Qx 1 2 3 4 5 6 TUx MUx 30 55 30 25 75 20 90 7 100 105 105 8 100 Fall ‘ 97 15 10 5 0 -5 If the two goods were “free,” [ or no budget constraint], the individual would consume each good until the MU of that good was 0, 7 units of good X and 6 of Y. Once the goods have a price and there is a budget constraint, the individual will try to maximize the utility from each additional dollar spent. Principles of Microeconomics Good Y Utility Y Qy 1 2 3 4 TUy MUy 60 90 60 30 110 20 120 10 5 6 128 7 120 8 100 - 20 128 8 0 -8 Slide -- 17 Given the budget constraint, Individuals will attempt to gain the maximum utility for each additional dollar spent, “the marginal dollar.” Utility X Qx 1 2 3 4 5 6 TUx MUx 30 55 30 25 75 20 90 7 100 105 105 8 100 Fall ‘ 97 15 10 5 0 -5 MUX PX 10. 8.33 For PX = $3, the MUX per dollar spent on good X is; For PY = $5, the 6.67 MUY per dollar 5.00 spent on good Y is; 3.33 1.67 0 Principles of Microeconomics MUY PY Utility Y Qy 12 1 6 2 4 3 4 2 1.6 0 5 6 TUy MUy 60 90 60 30 110 20 120 10 7 128 128 120 8 0 -8 8 100 - 20 Slide -- 18 Now the preferences of the individuals and the relative prices of the two goods are displayed in the tables. Utility X Qx 1 2 3 4 5 6 TUx MUx 30 55 30 25 75 20 90 7 100 105 105 8 100 Fall ‘ 97 15 10 5 0 -5 MUX PX 10. 8.33 6.67 5.00 3.33 1.67 0 MUY PY If the objective is to maximize utility given prices, preferences, and budget, spend each additional $ on the good that yields the greater utility for that expenditure. Principles of Microeconomics Utility Y Qy 12 1 6 2 4 3 4 2 1.6 0 5 6 TUy MUy 60 90 60 30 110 20 120 10 7 128 128 120 8 0 -8 8 100 - 20 Slide -- 19 Given the preferences of the individual and the relative prices of the goods [PX = $3, PY = $5], the MU’s for each dollar spent are: To maximize TU given a budget of $30,the first expenditure would logically be for good Y since the MUY for each dollar is 12. MUX PX 10. 8.33 $3 $3 6.67 $3 $3 5.00 3.33 1.67 0 $3 The second expenditure is for good X, [MUX $ is greater than MUY $] The third & fourth expenditures are for good X since the MU per dollar spent is greater for X than Y. MUY PY $5 $5 $5 The fifth expenditure is for is for good Y. Continue to maximize the MU per $ spent. AT THIS POINT YOU HAVE SPENT THE BUDGET OF $30. MUY MUX MUY MUX PX Fall ‘ 97 >P Y , BUY X ! PX <P Principles of Microeconomics Y , BUY Y ! Slide -- 20 12 6 4 2 1.6 0 MUX PX >MU P MUX PX <MU P Y Y Y Y says that the marginal utility of an additional dollar spent on good X is greater than that of a dollar spent on good Y. indicates that the MU per dollar spent on good Y exceeds that of a dollar spent on good X. If the amount spent on the two goods is equal to the budget then MUX MUY suggests that the individual should buy PY less of Y in order to buy more of X. PX > MUX PX <MU P Y Y says to purchase less X to pay for additional amounts of Y. MUX MUY is an equilibrium condition! PX = PY Fall ‘ 97 Principles of Microeconomics Slide -- 21 MUX MUY subject to the constraint: P X = PY PX X + PY Y = B insures the individual has maximized their total utility and has not spent more on the two goods than their budget. This model can be expanded to include as many goods as necessary: MUX MUY MUZ = P PX = PY Z = . . . = subject to; MUN PN PX X + PY Y + Pz Z + . . . + PN N = B From this information a demand for the goods can be constructed. Fall ‘ 97 Principles of Microeconomics Slide -- 22 Given the preference functions for goods X and Y, and the prices of the two goods: PX = $3, PY = $5. the MU of derived from each dollar MUY Utility X MUX of expenditure Utility Y PX PY can be calculated. Qy TUy MUy Qx TUx MUx 1 2 3 4 5 6 30 55 30 25 75 20 90 7 100 105 105 8 100 Fall ‘ 97 15 10 5 0 -5 10. If the individual is 8.33 maximizing utility, 6.67 their choices, constrained by 5.00 their preferences, 3.33 the prices and 1.67 their budget can be shown: 0 Principles of Microeconomics 12 1 6 2 4 3 4 2 1.6 0 5 6 60 90 60 30 110 20 120 10 7 128 128 120 8 0 -8 8 100 - 20 Slide -- 23 Given preferences, prices [PX = $3, PY = $5] and budget [$30], the individual’s choices were: MUX PX 10. 8.33 6.67 5.00 3.33 1.67 0 Five units of X and 3 units of Y were purchased These choices can be shown in the context of a demand model: $3 $5 PX 5 $3 $5 $3 4 $5 $3 PX = 3 This point lies on the $3 2 demand for good X. . 1 At PX = $3, given budget, Py and preferences, 1 2 5 units of X are purchased. Fall ‘ 97 3 4 55 Principles of Microeconomics 6 7 QX/ut Slide -- 24 MUY PY 12 6 4 2 1.6 0 Given the individual’s preferences, the price of Y [PY] and the budget [B = $30], the individual purchased 5 units of X when the price of X [PX ] was $3. MU MUXX PPXX MUX PX [$3] [$5] [$5] 10. 6 8.33 5 $5 6 $5 5 6.67 4 5.00 3 $5 4 3 3.33 2 1.671 0 0 Raise the price of X [PX ] to $5 and the MUX per $ spent is reduced. 2 1 MU 0X PX = Fall ‘ 97 . Choices about spending the $30 are now: PX 5 4 3 2 MUY PY The $30 is now spent. 1 . Demand That portion of demand between $3 and $5 is mapped! 1 2 3 4 5 Principles of Microeconomics $5 12 $5 6 $5 4 At PX = $5, ceteris paribus, 3 units of X are purchased. 6 7 MUY PY QX/ut Slide -- 25 2 1.6 0 Demand · By continuing to change the price of good X [and holding all other variables, PY , budget or income and preferences constant,] the rest of the demand for good X can be mapped. · All price and quantity combinations on the demand for X are equilibrium points for the consumer [They are maximizing utility; holding all other variables, PY , budget or income and preferences constant] Fall ‘ 97 Principles of Microeconomics Slide -- 26 By changing the price of the good [in this case, good X] and holding all other variables [PY , budget or income and preferences] constant, the demand for the good can be mapped. The demand function is a schedule of the P X quantities that individuals are willing 5 and able to buy at a 4 schedule of prices 3 during a specific 2 period of time, ceteris paribus. 1 1 Fall ‘ 97 2 3 Principles of Microeconomics 4 5 6 7 QX/ut Slide -- 27 The demand function has a negative slope because of the income and substitution effects. Income effect: As the price of a good that you buy increases and money income is held constant, your real income decreases and you can not afford to buy as much as you PX could before. Substitution effect: As the price of one good rises relative to the prices of other goods, you will tend to substitute the good that is relatively cheaper for the good that is relatively more expensive. 5 4 3 2 1 1 Fall ‘ 97 2 3 Principles of Microeconomics 4 5 6 7 QX/ut Slide -- 28 Income effects · As the price of a good that you buy increases, you will have less real income. · This is the basis of price indices that measure changes in real income as prices rise or fall. · The consumer price index is one of the indices that is used [currently there is a debate about how it is calculated]. Fall ‘ 97 Principles of Microeconomics Slide -- 29 Substitution Effects · As the price of a good increases [decreases] while the prices of other goods is constant, it becomes relatively more [less] expensive. · Individuals would substitute relatively less expensive goods for relatively more expensive ones even if their real income were constant. Fall ‘ 97 Principles of Microeconomics Slide -- 30 CONSUMER SURPLUS Notice that someone is willing and able to pay $6.80 for the first unit. If the market price [established by S and D] were $3, the buyer would purchase at $3 even though they were willing to pay $6.80 for the first unit. PX 7 They receive utility 6.80 that they did not have 6 to pay for [6.80-3.00]. 5 This is called consumer 4 surplus. At market equilibrium, Consumer surplus will be the area above the market price and below the demand function. Fall ‘ 97 . consumer surplus 3 2 1 1 2 3 Principles of Microeconomics 4 5 6 7 QX/ut Slide -- 31 Demand · Demand functions can be derived from utility [cardinal measures] or indifference functions [ordinal measures] · Normally, demand functions show and inverse relationship between price and quantity · a change in price “causes” a change in “quantity demanded” · a change in any other variable [income, prices of related goods, population, preferences, . . .] will “cause a change in demand” or shift of demand Fall ‘ 97 Principles of Microeconomics Slide -- 32