Managerial Economics G3 Consumer Behaviors

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Basic Assumptions Indifference The Consumers Utility Individual and
Of Consumer Curve Budget Constraint Maximization Market Demand
Theory Curves

1 2 3 4 5

Managerial Economics G3 Consumer Behaviors

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Table Of Contents
Sindy E
 Managerial Economics
Consumer
Behaviors

Basic consumer theory treats buyers as if they are completely

informed about all things that matter to them.

the range of the prices of the capacity incomes

products available all products of products to
satisfy

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Basic Assumptions Of
Consumer Theory 1 2 3 4 5
 Managerial Economics
Consumer
Behaviors

Consumer Preferences

Consumers always
Consumer preferences Consumer preferences prefer more of a
are completed are transitive good to less of the good.

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Basic Assumptions Of
Consumer Theory 1 2 3 4 5
 Managerial Economics
Consumer
Behaviors

Consumer preferences
are completed

Consumers are able to rank all

Consumer preferences conceivable bundles of commodities.
are transitive according to the level of satisfaction
they would enjoy from consuming the
bundles.
Consumers always
prefer more of a
good to less of the good.

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Basic Assumptions Of
Consumer Theory 1 2 3 4 5
 Managerial Economics
Consumer
Behaviors

Consumer preferences
are completed

Consumer preferences are transitive

when they are consistent in the
Consumer preferences following way.
are transitive
if A > B, and B > C, then it follows
that A > C.
Consumers always
prefer more of a
good to less of the good.

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Basic Assumptions Of
Consumer Theory 1 2 3 4 5
 Managerial Economics
Consumer
Behaviors

Consumer preferences
are completed
consumers always prefer to have
more of a good rather than less of the
good.
Consumer preferences
are transitive Consumer purchase so much of a
good that they would be happier to
have less of it.
Consumers always
prefer more of a
good to less of the good.

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Basic Assumptions Of
Consumer Theory 1 2 3 4 5
 Managerial Economics
Consumer
Behaviors

Utility Utility Function

Benefits consumers obtain An equation that shows an

from the goods and services individual’s perception of the
they consume level of utility That would be
attained from consuming each
conceivable bundle of goods

 𝑼 =𝒇 ( 𝑿 , 𝒀 )

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Basic Assumptions Of
Consumer Theory 1 2 3 4 5
 Managerial Economics
Consumer
Behaviors

An indifference curve is a set of points

representing different bundles of goods and
services, each of which yields the same level
of total utility.

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Indifference Curve 1 2 3 4 5
 Managerial Economics
Consumer
Behaviors

• Indifference curves are downward sloping.

• Indifference curves are convex.

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Indifference Curve 1 2 3 4 5
 Managerial Economics
Consumer
Behaviors

Marginal rate of substitution (MRS)

Measures the number of units of Y that must

be given up per unit of X added so as to
maintain a constant level of utility.

  ∆𝑌
𝑀𝑅𝑆=−
∆𝑋

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Indifference Curve 1 2 3 4 5
 Managerial Economics
Consumer
Behaviors

Indifference Maps

An indifference map is made up of two or

more indifference curves. The indifference
map shows the preference ordering of all
conceivable bundles of goods.

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Indifference Curve 1 2 3 4 5
 Managerial Economics
Consumer
Behaviors

Marginal utility A Marginal Utility Interpretation of MRS

The addition to total utility that is
attributable to the addition of one unit of
a good to the current rate of
consumption, holding constant the
amounts of all other goods consumed.
The MRS shows the rate at which one
good can be substituted for another while
keeping utility constant.

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Indifference Curve 1 2 3 4 5
 Managerial Economics
Consumer
Behaviors

Budget Lines

The Line showing all consumption

bundles of goods that can be purchased
at given set of prices if the entire income
is spent.

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The Consumers Budget

1 2 3 4 5
Constraint
 Managerial Economics
Consumer
Behaviors

Shifting the Budget Lines

If income (M) or the price ratio (Px/Py) changes, the budget line must change.

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The Consumers Budget

1 2 3 4 5
Constraint
 Managerial Economics
Consumer
Behaviors

An increase (decrease) in income causes a parallel outward (inward) shift in the budget line.

An increase (decrease) in the price of X causes the budget line to pivot inward (outward) around the
original vertical intercept.

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The Consumers Budget

1 2 3 4 5
Constraint
 Managerial Economics
Consumer
Behaviors

Maximizing Utility Subject to a Limited Income

A consumer maximizes utility subject to a limited income at the combination of goods for which the
indifference curve is just tangent to the budget line. At this combination, the marginal rate of
substitution (the absolute value of the slope of the indifference curve) is equal to the price ratio (the
absolute value of the slope of the budget line)

  𝑃𝑥
𝑀𝑅𝑆 =
𝑃𝑦

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Utility Maximization 1 2 3 4 5
 Managerial Economics
Consumer
Behaviors

Maximizing Utility Subject to a Limited Income

Known :
Price pizza $8
Price Burger $4
Monthly food budget $400

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Utility Maximization 1 2 3 4 5
 Managerial Economics
Consumer
Behaviors

Marginal Utility Interpretation of Consumer Optimization

To obtain maximum satisfaction from a limited income, a consumer

allocates income so that the marginal utility per dollar spent on each
good is the same for all commodities purchased, and all income is
spent.

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Utility Maximization 1 2 3 4 5
 Managerial Economics
Consumer
Behaviors

Marginal Utility Interpretation of Consumer Optimization

Known :
Price hotdogs $5
Price cokes $4
food budget $40

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Utility Maximization 1 2 3 4 5
 Managerial Economics
Consumer
Behaviors

Individual Consumer’s Demand Curve

The demand curve of an individual for

a specific commodity relates utility-
maximizing quantities purchased to
market prices, holding constant
income and the prices of all other
goods. The slope of the demand curve
illustrates the law of demand.

Quantity demanded varies inversely

with price.

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Individual and Market

1 2 3 4 5
Demand Curves
 Managerial Economics
Consumer
Behaviors

Market Demand and Marginal Benefit

The market demand curve is the horizontal

summation of the demand curves of all
consumers in the market.

It therefore shows how much all consumers

demand at each price over the relevant range of
prices.

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Individual and Market

1 2 3 4 5
Demand Curves
 Managerial Economics
Consumer
Behaviors

Corner Solutions

The utility-maximizing bundle lies at one

of the end points of the budget line and
the consumer chooses to consume zero
units of a good

Corner solutions occur for good X when the

consumer spends all of her income, yet the
marginal utility per dollar spent on X is less
than the marginal utility per dollar spent on
any other good that is purchased.

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Individual and Market

1 2 3 4 5 6
Demand Curves
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