Welcome to Scribd. Sign in or start your free trial to enjoy unlimited e-books, audiobooks & documents.Find out more
Download
Standard view
Full view
of .
Look up keyword
Like this
1Activity
0 of .
Results for:
No results containing your search query
P. 1
Salvatore Chapter 3

Salvatore Chapter 3

Ratings: (0)|Views: 26|Likes:
Published by Atif Rao

More info:

Published by: Atif Rao on Oct 10, 2012
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

10/10/2012

pdf

text

original

 
CHAPTER
3
Consumer Preferences and Choice
I
nthischapter,webegintheformalstudyofmicroeconomicsbyexaminingtheeco-nomicbehavioroftheconsumer.Aconsumerisanindividualorahouseholdcomposedofoneormoreindividuals.Theconsumeristhebasiceconomicunitthatdetermineswhichcommoditiesarepurchasedandinwhatquantities.Millionsofsuchdecisionsaremadeeachdayonthemorethan$13trillionworthofgoodsandservicesproducedbytheAmericaneconomyeachyear.Whatguidestheseindividualconsumerdecisions?Whydoconsumerspurchasesomecommoditiesandnotothers?Howdotheydecidehowmuchtopurchaseofeachcommodity?Whatistheaimofarationalconsumerinspendingincome?Thesearesomeoftheimportantquestionstowhichweseekanswersinthischapter.Thetheoryofcon-sumerbehaviorandchoiceisthe
rststepinthederivationofthemarketdemandcurve,theimportanceofwhichwasclearlydemonstratedinChapter2.We begin the study of the economic behavior of the consumer by examining tastes.Consumers
tastes can be related to utility concepts or indifference curves. These are
57Chapter Outline
3.1Utility Analysis3.2Consumer
s Tastes:Indifference Curves3.3International Convergence of Tastes3.4The Consumer
s Income and Price Constraints:The Budget Line3.5Consumer
s Choice
List of Examples
3
1Does Money Buy Happiness?3
2How Ford Decided on the Characteristics of ItsTaurus3
3Gillette Introduces the Sensor and Mach3Razors
Two Truly Global Products3
4Time as a Constraint3
5Utility Maximization and Government Warningson Junk Food3
6Water Rationing in the WestAt the Frontier:The Theory of RevealedPreference
 After Studying This Chapter, You Should Be Able to:
Know how consumer tastes are measured or represented
Describe the relationship between money and happiness
Know how the consumer
s constraints are represented
Understand how the consumer maximizes satisfaction or reaches equilibrium
Describe how consumer tastes or preferences can be inferred without asking the consumer
 
58
PART TWOTheory of Consumer Behavior and Demand
1
That is,some effort (disutility),no matter how small,is required to get rid of the sixth hamburger. Assumingthat the individual cannot sell the sixth hamburger,he or she would not want it even for free.
discussed in the
rst two sections of the chapter. In Section 3.3,we examine the conver-gence of tastes internationally. We then introduce the budget line,which gives the con-straints or limitations consumer
s face in purchasing goods and services. Constraints arisebecause the commodities that the consumer wants command a price in the marketplace(i.e.,they are not free) and the consumer has limited income. Thus,the budget line re
ectsthe familiar and pervasive economic fact of scarcity as it pertains to the individual con-sumer.Because the consumer
s wants are unlimited or,in any event,exceed his or herability to satisfy them all,it is important that the consumer spend income so as to max-imize satisfaction. Thus,a model is provided to illustrate and predict how a rationalconsumer maximizes satisfaction,given his or her tastes (indifference curves) and theconstraints that the consumer faces (the budget line). The
At the Frontier
section pre-sents a different way to examine consumer tastes and derive a consumer
s indifferencecurves.The several real-world examples and important applications presented in the chapterdemonstrate the relevance and usefulness of the theory of consumer behavior and choice.
U
TILITY
A
NALYSIS
Inthissection,wediscussthemeaningofutility,distinguishbetweentotalutilityandmarginalutility,andexaminetheimportantdifferencebetweencardinalandordinalutil-ity.Theconceptofutilityisusedheretointroducetheconsumer
stastes.Theanalysisof consumertastesisacrucialstepindetermininghowaconsumermaximizessatisfactioninspendingincome.
Total and Marginal Utility
Goods are desired because of their ability to satisfy human wants. The property of a goodthat enables it to satisfy human wants is called
utility.
As individuals consume more of agood per time period,their
total utility (
TU 
)
or satisfaction increases,but their marginalutility diminishes.
Marginal utility (
 MU 
)
is the extra utility received from consumingone additional unit of the good per unit of time while holding constant the quantity con-sumed of all other commodities.For example,Table 3.1 indicates that one hamburger per day (or,more generally,oneunit of good
 X 
per period of time) gives the consumer a total utility (
TU 
) of 10 utils,wherea
util
is an arbitrary unit of utility. Total utility increases with each additional hamburgerconsumed until the
fth one,which leaves total utility unchanged. This is the
saturation point.
Consuming the sixth hamburger then leads to a decline in total utility because of storage or disposal problems.
1
The third column of Table 3.1 gives the extra or marginalutility resulting from the consumption of each
additional
hamburger. Marginal utility ispositive but declines until the
fth hamburger,for which it is zero,and becomes negativefor the sixth hamburger.
3.1
Utility
The ability of agood to satisfy a want.
Total utility (
TU 
)
The total satisfactionreceived fromconsuming a goodor service.
Marginal utility (
 MU 
)
The extra utility receivedfrom consuming oneadditional unit of agood.
Util
The arbitrary unitof measure of utility.
03-Salvatore-Chap03.qxd 08-08-2008 12:41 PM Page 58
 
CHAPTER 3Consumer Preferences and Choice
59
PlottingthevaluesgiveninTable3.1,weobtainFigure3.1,withthetoppanelshowingtotalutilityandthebottompanelshowingmarginalutility.Thetotalandmarginalutilitycurvesareobtainedbyjoiningthemidpointsofthebarsmeasuring
TU 
and
MU 
ateachlevelofconsumption.Notethatthe
TU 
risesbysmallerandsmalleramounts(theshadedareas) andsothe
MU 
declines.Theconsumerreachessaturationafterconsuming
Total and Marginal Utility
Q
 X 
TU 
 X 
 MU 
 X 
00...110102166320442225220620
2
TABLE 3.1
FIGURE 3.1Total and Marginal Utility
In the top panel,total utility (
TU 
) increases by smaller and smaller amounts (theshaded areas) and so the marginal utility (
MU 
) in the bottompanel declines.
TU 
remains unchanged with the consumption ofthe fifth hamburger, and so
MU 
is zero. After the fifth hamburgerper day,
TU 
declines and
MU 
is negative.
221001620561234
   T  o   t  a   l  u   t   i   l   i   t  y  o   f
   X
TU 
TU 
Quantity of 
121086420123564-2
MU 
   M  a  r  g   i  n  a   l  u   t   i   l   i   t  y  o   f
   X
MU 
Quantity of 
03-Salvatore-Chap03.qxd 08-08-2008 12:41 PM Page 59

You're Reading a Free Preview

Download
scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->