Consumer Choice

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

Consumer Why do we feel so good about

our purchases?
Choice

Why do we buy certain

products but not others?
Consumer Behavior

Consumer Budget
Preference Constraints

Consumer
Choices
Socio Psychiatric Explanation

Psychiatrists Psychologists Sociologists

Freudian Approach
Sociologists talks
– Id, ego and
about consumption
superego drives
related to
and motivates us to
recognition
buy, buy and buy
 Three Basic Assumptions
of Consumer Preference

Completeness
Consumer
Preference Transitivity

More is better than less

 Cardinal Utility- Numerical
representation of utility

Utility or Ordinal Utility- Refers to

Preference 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
  Convex to Origin
 ICs cannot intersect

Properties of  Marginal rate of Substitution

Diminishing Marginal Rate of
Indifference

substitution

Curve
 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 – related to income
 Budget line- shows the combination of
food and clothing for which the total
Budget amount is spent
 Pf F+ Pc C= M – Budget Constraint
Constraints  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