Eric Stevanus - 2201756600

- LA28
Sub Topics
a. Consumer Behavior
the study of consumers and the processes they use to choose, use (consume), and dispose
of products and services, including consumers' emotional, mental, and behavioral
responses.

b. Indifference curve
an indifference curve connects points on a graph representing
different quantities of two goods, points between which a
consumer is indifferent.
We use it to understand the preferred combinations of two goods
that maximizes the marginal utility, and to understand the
marginal rate of substitution between those two goods.
We can also use it to understand how we can increase the marginal
utility in the future by investing in equipment, technology, new
manufacturing, etc.

c. Marginal rate of substitution (MRS)

the rate or value of exchange people are willing to give up on one goods to gain a quantity in
the other one. for example let’s say that in a point in the indefference curve, we have 20
pizza, and 1 laptop. And to produce one more laptop, we have to give up 3 pizza. So another
production possibility for this is 17 pizza, and 2 laptop. So the marginal rate of substitution
for 1 laptop, is 3 pizza. We can also call this the slope of the indefference curve itself.
Similar goods usually has as close to 1:1 marginal rate of subtitution, while different goods
will stray away from that number, like the pizza and laptop example i just talked about.
Eric Stevanus - 2201756600
- LA28
d. The budget constraint
a budget constraint represents all the combinations of goods and services
that a consumer may purchase given current prices within their given
income. This also talks about opportunity cost and choices the consumer
might choose when purchasing between two types of related goods.
Consumer theory uses the concepts of a budget constraint and a
preference map to analyze consumer choices.

e. Budget set
 A budget set or opportunity set includes all possible
consumption bundles that someone can afford given the prices
of goods and the person's income level.

the budget constraint, is the whole idea of the graphic that

shows which is affordable and which is unaffordable
the budget set is the affordable area of those graphics
f. Budget line
the budget line, is the line itself from the graphics that shows the maximum affordable
quantity that maximizes marginal utility from those two goods.

g. Market rate of substitution

The rate at which one good can be exchanged for another at current market prices. For
example lets say that a pizza cost is $10, while coffee is $5. So the market rate of subtitution
is 1 pizza = 2 coffee , or 1 coffee= 0,5 pizza

h. Changes income
Changes income will move the budget line or budget constraint graphic, if incomes rises, the
line would move to the right, and if income decreases, it would move to the left. However,
changes in income would not change the market rate of subtituion, nor the marginal rate
substitution or the slope of the line. Because the price of those products, remains the same

i. Changes in prices
On the other hand, when prices change, lets say that because a new technology has been
found and production coffee moves coffy supply to the right, and prices of coffee goes down
Eric Stevanus - 2201756600
- LA28
to $2. Well now the market rate of subtitution is 1 pizza= 5 coffee. Coffee is a lot cheaper
now. And the slope of the graph will change as well, as it shows a new opportunity cost or
budget line for the consumer to consider.

j. Consumer equilibrium
the purchasing possibility options chosen by a consumer that maximizes their marginal
utitlity value from both product from the indefference curve within their budget constraint or
line, given their current income and market prices. The following criteria defines what the
consumer equilibrium is:
 Budget line should
be tangent to the
indifference curve
 At the point of
equilibrium, slope of
the budget line =
slope of the
indifference curve
 Indifference curve
should be convex to
the point of origin.

k. Price changes and consumer behavior

when price changes, the slope of the consumer budget constraint changes, and this affects
how they would decide on the opportunity cost when choosing all the different possibilities of
consumption that maximizes their marginal utility ( the maximum marginal utility remains
the same).
l. Income changes and consumer behavior
when incomes changes, the budget line or budget constraint moves either to the right ( when
increases), and to the left (when decreases). This allows the consumer to gain more marginal
utility from those two goods, as they now can afford more items therefore gaining more
satisfactions.
Eric Stevanus - 2201756600
- LA28
m. Substitution and income effects
The income effect is the change in the consumption of goods by consumers based on
their income.This changes their marginal utility. We can also analyze the marginal
propensity to consume from those consumers as it’s being affected by the changes in
income, and look at their marginal propensity to save as well.
The income effect can be direct an indirect, direct when the changes in behaviour comes
from the consumer itself, for example they spend more when their incomes increases
Inderect when the changes comes from external factors that forces the consumer to change,
for example the price of food increases, so the consumer chooses to avoid eating out, and
prefers to eat home and cooked their own meal, etc.

The substitution effect happens when consumers replace cheaper items with more

expensive ones when their financial conditions change. The inverse is true when incomes
decrease. we can see this easily when we’re going out to eat for example and restaurant A
is more expensive than restaurant B for example, and so consumers would rather eat at
restaurant B since it’s cheaper.so in this example we can say that restaurant B is the
substitute for restaurant A.
We can also use this for a company’s production cost when they use cheaper labor and
replace the current ones that will result in a positive in cost reductions , however may result
in a negative outcome from those employees who were replaced.