Theory of consumer behaviour消费者行为理论.doc

Economics of consumer behaviourThe willingness of consumers to purchase a product or service is essential for any firm to earn a profit.Firms need to be able to estimate and forecast the demand for their products.Therefore the theory of consumer behaviour is an essential part of managerial economics.Basic assumptions of consumer theoryIn the theory of consumer behaviour, it is assumed that all individuals make consumption decisions in order to maximise their satisfaction from consuming various goods and services. However, each consumer has a limited personal income. For simplicity, it is assumed that all consumers spend all of their personal income.It is also assumed that each consumer has perfect knowledge: they know about all products that are available, they know the prices of the products, and they know their own personal income.It is assumed that consumers can rank combinations of goods and services consumed, or consumption bundles, according to the level of satisfaction they obtain from each bundle (see Figure 1.1).Preferences are complete if the consumer always can make one of the following responses when asked about their preferences between any two consumption bundles:1. I prefer bundle A to bundle B (AB)2.I prefer bundle B to bundle A (BA)3.I am indifferent between bundles A and B (AB).It is also assumed that preferences are transitive: if AB and BC, then AC.Finally, it is assumed that more is always preferred to less: having more of a good always increases satisfaction and never decreases satisfaction.Utility is the term used by economists for the satisfaction that is obtained from consumption. Although utility is not directly measurable, economists assume that preferences can be represented using a utility function. The numerical values assigned to utility by the utility function are arbitrary, because utility is not observable or measurable. For a consumer who consumes only two goods, we can write:U=f(X,Y)where X and Y are the quantities consumed of goods X and Y.For a consumer who consumes N goods, we can write:U=f(X1,X2,X3,.,XN)where X1,X2,X3,.,XN are the quantities consumed of goods 1,2,3,.,N. Without any loss of generality, most of the following analysis will be developed for the two-good case.Indifference curvesAn indifference curve is a set of points representing different combinations or bundles of goods and services, each of which provides the same level of utility. The consumer is indifferent between all points located on the same indifference curve (see Figure 1.2).Indifference curves are always downward sloping. If more of Good X is added, some of Good Y must be taken away in order to maintain the same level of utility. Indifference curves are always convex: If very little of X and lots of Y is being consumed (point A), the consumer would be prepared to sacrifice a large amount of Y in order to gain one additional unit of X. If lots of X and very little of Y is being consumed (point C), the consumer would be prepared to sacrifice only a small amount of Y in order to gain one additional unit of X. Marginal rate of substitutionThe marginal rate of substitution (MRS) measures the number of units of Y that must be taken away for each unit of X that is added, so as to maintain a constant level of utility.The consumer is indifferent between A (X=10, Y=60) and B (X=20, Y=40).The consumer is also indifferent between C (X=40, Y=20) and D (X=50, Y=15).From B to A, MRS = From D to C, MRS = At any individual point on the indifference curve, the MRS is the slope of the indifference curve at that point. Usually the MRS is expressed without the minus-sign; i.e. from B to A, MRS=2; and from D to C, MRS = . Therefore MRS is the absolute value of the slope of the indifference curve.The correct definition for the marginal rate of substitution isMRS = Due to the convexity of the indifference curve, MRS decreases as X increases. Indifference mapsAn indifference map shows a complete set of indifference curves, each representing a different level of satisfaction or utility. Higher indifference curves represent higher levels of utility, because of the assumption that more is always preferred to less (see Figure 1.3). MRS and marginal utilityThere is a close relationship between MRS and marginal utility. Marginal utility is the amount of additional satisfaction a consumer obtains from a small change in the consumption of a good.As you eat more and more apples, the amount of additional satisfaction you obtain from eating each additional apple becomes smaller and smaller. This is known as the law of diminishing marginal utility.Let DX and DY denote small changes in the consumption of Goods X and Y.Let MUX and MUY denote the marginal utilities of Goods X and Y.Let DU denote the change in utility resulting from the small changes in consumption, DX and DY.We can writeDU = (MUX DX) + (MUY DY)If DX and DY are chosen so that the consumer remains on the same indifference curve, then MRS = , and DU = 0. We can write (MUX DX) + (MUY DY) = 0ororMRS = As the consumption of Good X increases, MUX decreases, and MRS also decreases.The consumers budget constraintThe budget line A budget line shows all combinations or bundles of goods the consumer can afford to buy from a fixed income.It is assumed that the prices per unit of Good X and Good Y consumed are determined in the markets for these goods (and are therefore treated by the consumer as fixed).Suppose the consumers income is $1000, and suppose the price of Good X is $5 per unit and the price of Good Y is $10 per unit. We can write5X + 10Y = 1000The consumer can afford either (X=0, Y=100), or (X=40, Y=80), or (X=120, Y=40), or (X=200, Y=0), or various other linear combinations of X and Y for which total expenditure is 1000.Solving for Y in terms of X10Y = 1000 5XorY = 100 XLet M denote total income or total expenditure, and let PX and PY denote the prices of Goods X and Y.We can write (PX X) + (PY Y) = MorFigure 1.4 shows the consumers budget line. The slope of the budget line shows the amount of Y that must be given up if one more unit of X is purchased, in order to maintain an unchanged level of total expenditure. The slope of the budget line depends on PX and PY.In Figure 1.4, PX=5, PY=10 and M=1000. If all of the budget is spent on X, the consumer can afford 1000/5 = 200 units of X. If all of the budget is spent on Y, the consumer can afford 1000/10 = 100 units of Y.In general, let DX and DY denote small changes in the consumption of Goods X and Y.Let DM denote the change in expenditure resulting from these changes in consumption, DX and DY.We can writeDM = (PX DX) + (PY DY)If DX and DY are chosen so that total expenditure remains unchanged and the consumer remains on the budget line, then DM = 0. We can write (PX DX) + (PY DY) = 0orThe slope of the budget line is the ratio of the prices of the two goods. In Figure 1.4, the slope of the budget line is .Shifts in the budget lineA change in income causes a parallel shift in the budget line (see Figure 1.5A).For example, when M=1000, PX=5 and PY=10, the consumer can afford (X=0,Y=100) or (X=200,Y=0) (on budget line AB). If M increases to 1200, the consumer can afford (X=0,Y=120) or (X=240,Y=0) (on budget line RN).A change in the price of either good causes the budget line to pivot (see Figure 1.5B).For example, when M=1000, PX=5 and PY=10, the consumer can afford (X=0,Y=100) or (X=200,Y=0) (on budget line AB). If PX decreases to 4, the consumer can afford (X=0,Y=100) or (X=250,Y=0) (on budget line AD).Utility maximization The budget line shows all bundles of goods that are available to the consumer, given limited income and current prices.The indifference map reflects the consumers preferences between all possible bundles of goods.The consumer maximizes utility subject to the budget constraint by selecting the bundle of goods represented by the point of tangency between the budget line and the highest attainable indifference curve.In Figure 1.6, M=400, PX=4 and PY=8, where X = quantity of burgers, Y = quantity of pizzas. By spending all of the budget on either burgers or pizzas, the consumer could afford either (X=0,Y=50) or (X=100,Y=0). E is the point on the budget line at which utility is maximized, (X=40,Y=30). At E, the consumer is located on the highest attainable indifference curve III.At E we can write MRS = MRS (= the slope of the indifference curve) is the rate at which the consumer is willing to substitute Good Y for Good X. (= the slope of the budget line) is the rate at which the consumer is able to substitute Good Y for Good X.At points other than E in Figure 1.6, MRS .e.g. at point B, MRS , and at point C, MRS the % change in P, TR will increase; If the % change in Q = the % change in P, TR will remain unchanged; If the % change in Q 1 TR increases when P decreases. The % change in Q is greater than the % change in P. The demand curve is price elastic.If |E| = 1 TR remains unchanged when P decreases. The % change in Q equals the % change in P, so the effect on TR is neutral.If |E| 1 TR decreases when P decreases. The % change in Q is smaller than the % change in P. The demand curve is price inelastic.Factors affecting price elasticity of demand Availability of substitutes. The closer the substitutes for a good or service, the more price elastic