Lecture 7-9_The Theory of Consumer Behaviour.pptVIP

Lectures 7-9 The Theory of Consumer Behaviour Topics to be Discussed The concept of utility Cardinal and Ordinal Utility Consumer Preferences Budget Constraints Consumer Choice Utility Maximization Topics to be Discussed Market Demand Consumer Surplus Individual Demand Income and Substitution Effects The Concept of Utility Utility and Satisfaction Utility is the level of satisfaction that a person gets from consuming a good or undertaking an activity. The Concept of Utility Total utility is the total benefit that a person gets from the consumption of goods and services. Marginal Utility is the change in total utility that results from a one-unit increase in the quantity of a good consumed. The Law of Diminishing Marginal Utility states that the marginal utility decreases as the quantity of a good consumed increases. Utility Example: Coffee Utility Diminishing Marginal Utility The decline in additional utility from consumption of an additional unit of a good as more and more of the good is consumed Cardinal and Ordinal Utility But how is utility measured? Cardinal utility; utility can be measured Ordinal utility; utility cannot be measured, but preferences can be ranked (i.e. put into an order) The theory that we will outline now is based on the idea of ordinal utility Introduction to consumer theory There are three steps involved in the study of consumer behavior. 1) We will study consumer preferences. To describe how and why people prefer one good to another. 2) Then we will turn to budget constraints. People have limited incomes. Introduction to consumer theory There are three steps involved in the study of consumer behaviour. 3) Finally, we will combine consumer preferences and budget constraints to determine consumer choices. What combination of goods will consumers buy to maximize their satisfaction? Consumer Preferences A market basket is a collection of one or more commodities. One market basket may be preferred over another market basket