MICROECONOMICS

CHAPTER 5:
THE THEORY OF CONSUMER CHOICE
 Problem
A consumer divides his income of USD 200 between two goods: fish and
mango. Fish costs PF= USD 5 per fish and mango costs PM = USD 10 per
mango. Assume his utility function is given by: TU= 4*F1/4*M3/4 (F: the
number of fish consumed; M: the number of mango consumed). Find M and F
to maximize his utility?

Solution
• Utility (U): Lợi ích
• Total Utility (TU): Tổng lợi ích
• Marginal Utility (MU): Lợi ích cận biên
• Principle of Diminishing Marginal Utility: Quy luật lợi ích cận biên giảm dần
• Condition for maximizing utility: Tìm điều kiện để tối đa hóa lợi ích
 Theory of Utility (Lý thuyết lợi ích)
• Utility (U)
the satisfaction or pleasure that a consumer gets from the consumption of a
good or service
• Total utility (TU)
the total satisfaction or pleasure that a consumer gets from the consumption
of goods and services
• Marginal Utility (MU)
measures additional satisfaction obtained from consuming 1 additional unit
of goods or services.
the change in total utility due to a one-unit increase in the quantity of a good
or service.
MU = Q
 Principle of Diminishing Marginal Utility
Quy luật lợi ích cận biên giảm dần

Marginal utility is diminishing

as consumption increases.

Principle of Diminishing Marginal Utility:

The marginal utility of a good or service decreases as the quantity of the good
increases, ceteris paribus. In other words, total utility increases more and more
slowly as the quantity consumed increases.
 TU is maximized when
Draw a graph MU...?
The Budget Constraint:
What the Consumer Can Afford
• Example:
Hurley divides his income between two goods:
fish and mangos.
• A “consumption bundle” is a particular combination of
the goods, e.g., 40 fish & 300 mangos.
• Budget constraint: the limit on the consumption
bundles that a consumer can afford
ACTIVE LEARNING 1
The budget constraint
Hurley’s income: $1200
Prices: PF = $4 per fish, PM = $1 per mango
A. If Hurley spends all his income on fish,
how many fish does he buy?
B. If Hurley spends all his income on mangos,
how many mangos does he buy?
C. If Hurley buys 100 fish, how many mangos can he buy?
D. Plot each of the bundles from parts A – C on a graph that
measures fish on the horizontal axis and mangos on the
vertical, connect the dots.
 ACTIVE LEARNING 1
Answers Hurley’s budget
Quantity constraint shows
of Mangos
the bundles he can
afford.

Quantity
of Fish
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The Slope of the Budget Constraint
From C to D, Quantity The slope of the
of Mangos budget constraint
“rise” =
equals the relative
price of the good
“run” = on the X axis.
C
Slope = 4 D
Hurley must
give up
… mangos
to get one fish.

Quantity
of Fish
 The Budget Constraint:
What the Consumer Can Afford

• Budget constraint equation: I = PX.X + PY.Y

• Draw the budget constraint:
+ Vertical intercept =
+ Horizontal intercept =
can not afford
• Slope of budget constraint:

inefficient
 Show what happens to budget constraint if

PX, PY = const, I changes

I decreases:
I increases:
 Show what happens to budget constraint if

I, PY = const, PX changes
PX decreases:
PX increases:
 Show what happens to budget constraint if

I, PX = const, PY changes
PY decreases:
PY increases:
 Preferences: What the Consumer Wants

Indifference curve: Quantity One of Hurley’s

of Mangos indifference curves
shows consumption
bundles that give the
consumer the same
level of satisfaction B
A, B, and all other
bundles on I1 make A
Hurley equally happy: I1
he is indifferent
between them.
Quantity
of Fish
Four Properties of Indifference Curves

Quantity One of Hurley’s

1. Indifference curves of Mangos indifference curves
are downward-
sloping.

If the quantity of
B
fish is reduced,
the quantity of
A
mangos must be
I1
increased to keep
Hurley equally
happy. Quantity
of Fish
Four Properties of Indifference Curves

Quantity A few of Hurley’s

2. Higher indifference of Mangos indifference curves
curves are preferred
to lower ones.

Hurley prefers every

bundle on I2 (like C) C
D
to every bundle on I1 A I2
(like A). I1
He prefers every
bundle on I1 (like A) I0
to every bundle on I0 Quantity
of Fish
(like D).
Four Properties of Indifference Curves

Quantity Hurley’s
3. Indifference curves of Mangos indifference curves
cannot cross.
Suppose they did.
Hurley should prefer
B to C, since B has B
more of both goods.
Yet, Hurley is indifferent C A
between B and C: I1 I4
He likes C as much as A
(both are on I4).
He likes A as much as B Quantity
of Fish
(both are on I1).
Four Properties of Indifference Curves

Quantity
4. Indifference curves of Mangos
are bowed inward.
A
Hurley is willing to give
up more mangos for a 6
fish if he has few fish
1
(A) than if he has
B
many (B). 2
1 I1

Quantity
of Fish
The Marginal Rate of Substitution

Marginal rate of Quantity MRS = slope of

substitution (MRS):
of Mangos indifference curve
the rate at which a consumer
is willing to trade one good for A
another.
MRS = 6
Hurley’s MRS is the
amount of mangos he 1
would substitute for B
MRS = 2
another fish. 1 I1
MRS falls as you move
down along an Quantity
indifference curve. of Fish
 Optimization: What the Consumer Chooses
A is the optimum: Quantity
The optimum
the point on the budget constraint of Mangos
is the bundle
that touches the highest possible
Hurley most
indifference curve/ point where
1200 prefers out of
indifference curve is tangent to the
all the bundles
budget constraint.
he can afford.
Hurley prefers B to A, B
but he cannot afford B. 600
A

Hurley can afford C C

and D, D
but A is on a higher
indifference curve. 150 300 Quantity
of Fish
Optimization: What the Consumer Chooses
Quantity
At the optimum, of Mangos Consumer
slope of the optimization is
indifference curve another example
equals 1200 of “thinking at the
slope of the budget margin.”
constraint:
MRS = PF/PM A
600

marginal
price of fish
value of fish
(in terms of
mangos)
(in terms of 150 300 Quantity
mangos) of Fish
Kết luận: Điều kiện để tối đa hóa lợi ích khi lựa
chọn tiêu dùng (cân bằng tiêu dùng)
 SUMMARY
- Khái niệm: U; TU; MU (quy luật lợi ích cận biên giảm dần/quy luật lợi ích tới hạn)
(Utility, Total Utility, Marginal Utility, Principle of Diminishing Marginal Utility)
- Đường đồng ích: khái niệm, hệ số góc (MRS); 3 đặc điểm. (Indifference curve:
definition, slope (MRS), properties)
- Đường ngân sách: khái niệm, hệ số góc; 3 trường hợp thay đổi (Budget constraint:
definition, slope, 3 types of change)
- Điều kiện tối đa hóa lợi ích khi lựa chọn tiêu dùng (Condition for optimisation)