Managerial Economics Business strategy Chapter 4 The Theory of Individual Behavior (((( Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Managerial Economics & Business Strategy Chapter 4 The Theory of Individual Behavior
Overview I Consumer behavior Indifference Curve Analysis Consumer Preference Ordering IL. Constraints The Budget Constraint Changes in Income Changes in Prices III Consumer Equilibrium IV Indifference Curve analysis Demand Curves Individual demand Market demand Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Overview I. Consumer Behavior Indifference Curve Analysis Consumer Preference Ordering II. Constraints The Budget Constraint Changes in Income Changes in Prices III. Consumer Equilibrium IV. Indifference Curve Analysis & Demand Curves Individual Demand Market Demand
Consumer behavior Consumer Opportunities a The possible goods and services consumer can afford consume C onsumer preferences a The goods and services consumers actually consume Given the choice between 2 bundles of goods a consumer either Prefers bundle a to bundle b: a>B Prefers bundle b to bundle a:a<B a Is indifferent between the two: a-B Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Consumer Behavior • Consumer Opportunities The possible goods and services consumer can afford to consume. • Consumer Preferences The goods and services consumers actually consume. • Given the choice between 2 bundles of goods a consumer either Prefers bundle A to bundle B: A B Prefers bundle B to bundle A: A B Is indifferent between the two: A B
Indifference Curve analysis Indifference Curve GoodY A curve that defines the combinations of2 or more goods that give a consumer the same level of satisfaction Marginal rate of Substitution The rate at which a consumer is willing to substitute one good for another and stay at the same satisfaction leve GoodⅩ Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Indifference Curve Analysis Indifference Curve A curve that defines the combinations of 2 or more goods that give a consumer the same level of satisfaction. Marginal Rate of Substitution The rate at which a consumer is willing to substitute one good for another and stay at the same satisfaction level. I. II. III. Good Y Good X
Consumer Preference Ordering Completeness The consumer is capable of expressing a preference for all bundles of goods More is better Diminishing marginal Rate of Substitution Transitivity Given 3 bundles of goods: A. b& c Fasb andbsc then asc Ifab and b c then a c Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Consumer Preference Ordering • Completeness The consumer is capable of expressing a preference for all bundles of goods. • More is Better • Diminishing Marginal Rate of Substitution • Transitivity Given 3 bundles of goods: A, B & C. If A B and B C, then A C. If A B and B C, then A C