Theory of consumer behaviour消费者行为理论

1、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

2、.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 assum

3、ed 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 g

4、oods 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

5、 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 satisfac

6、tion 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 b

7、y 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 a

8、re 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 provid

9、es 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. Indiffer

10、ence 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 sac

11、rifice 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 in

12、different 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 exp

13、ressed 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 increase

14、s. 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 an

15、d 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 eatin

16、g each additional apple becomes smaller and smaller. This is known as the law of diminishing marginal utility.Let X and Y 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 U denote the change in utility resulting from the smal

17、l changes in consumption, X and Y.We can writeU = (MUX X) + (MUY Y)If X and Y are chosen so that the consumer remains on the same indifference curve, then MRS = , and U = 0. We can write (MUX X) + (MUY Y) = 0ororMRS = As the consumption of Good X increases, MUX decreases, and MRS also decreases.The

18、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

19、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 combin

20、ations 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

21、 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 aff

22、ord 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 X and Y denote small changes in the consumption of Goods X and Y.Let M denote the change in expenditure resulting from these changes in consumption, X and Y.We can writeM

23、= (PX X) + (PY Y)If X and Y are chosen so that total expenditure remains unchanged and the consumer remains on the budget line, then M = 0. We can write (PX X) + (PY Y) = 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 .Shif

24、ts 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

25、 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

26、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 constrain

27、t 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 con

28、sumer 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 t

29、he 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

30、 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

31、 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 demandAvailability of substitutes. The closer the substitutes for a good or service, the more price elastic the dem

32、and.Percentage of the consumers budget. The higher the percentage of the consumers total budget allocated to the good or service, the more price elastic the demand.The time period of adjustment. The longer the period of adjustment, the more price elastic the demand because the consumer has more time

33、 to switch to substitute goods or services.Calculating price elasticity of demandNote that % change in quantity = 100 (Q/Q) and % change in price = 100 (P/P)The formula for price elasticity of demand can be written: E = Dividing top and bottom by 100, we can write: E = or E = This final expression g

34、ives an alternative method for working out E , which is often the most convenient to use in practice.Price elasticity can be measured either over (1) an interval (or arc) along the demand curve, or (2) at a specific point on the demand curve. To compute elasticity over an interval: where Q and P are

35、 the changes in quantity and price over the interval, and average P and average Q are the averages of the values of P and Q at the ends of the interval.To compute elasticity at a point:E = where Q/P is the slope (gradient) of the demand curve at the point, and P and Q are the values at the point.Mar

36、ginal revenue, demand and price elasticityMarginal revenue is the addition to total revenue attributable to selling one extra unit of output:MR = The example sh illustrates the relationship between price (P), quantity demanded (Q), total revenue (TR) and marginal revenue (MR). MR=P for the first uni

37、t of output sold (Q=1).MR1). In order to sell an additional unit, the firm must reduce the price for all of the units it is currently selling and lose revenue on these units. Therefore for Q1, the marginal revenue obtained from selling an additional unit is always less than the price charged for the

38、 sale of the additional unit.MR0 for Q6. MR is positive, because the price charged for the additional unit is greater than the loss of revenue from having to reduce the price of all the units that are currently sold.MR=0 for Q=6. MR is zero, because the price charged for the additional unit equals t

39、he loss of revenue from having to reduce the price of all the units that are currently sold.MR6. MR is negative, because the price charged for the additional unit is less than the loss of revenue from having to reduce the price of all the units that are currently sold.There is a close relationship between marginal revenue (MR) and price elasticity of demand (E).When MR0, |E|1 because TR increases as Q increases and P decreases.When MR=0, |E|=1 because TR remains unchanged as Q increases and P decreases.When MR0, |