Ch 4甲烷4. The Theory of Individual Behavior WordPress.ppt

Ch 4. The Theory of Individual Behavior * Consumer Behavior Assume 2 goods exist in the economy. Assume a consumer is able to order his or her preferences for alternative bundles or combinations of goods from best to worst. * Consumer Behavior A B the consumer prefers bundle A to bundle B. A – B the consumers view the two bundles as equally satisfying. He or she indifferent between bundles A and B. * Consumer Behavior The preference ordering is assumed to satisfy four basic properties: 1. Completeness. 2. More is better. 3. Diminishing marginal rate of substitution. 4. Transitivity. * Consumer Behavior Completeness: - for any two bundles, say A and B, either A B, B A, A – B. * Consumer Behavior More is better: - for any two bundles, say A and B, either A B, B A, A – B. Figure 4-1 Page 120. * Consumer Behavior Diminishing marginal rate of substitution: - As a consumer obtains more of good X, the rate at which he or she is willing to substitute good X for good Y decreases. * Consumer Behavior Transitivity: - For any three bundles, A, B, and C, if A B and B C, then A C. Similarly A – B, and B – C, then A - C * The Budget Constraint Budget set: The bundles of goods a consumer can afford. Px X + Py Y equals or less M The budget set. * The Budget Constraint Budget line: The bundles of goods that exhaust a consumer’s income. Px X + Py Y = M The budget line. * Changes In Income Changes in income shrink or expand opportunities. Figure 4-5 Page 126. * Changes In Prices Figure 4-6 Page 127. * Consumer Equilibrium The objective of the consumer is to choose the consumption bundle that maximizes his or her utility, or satisfaction. Consumer equilibrium: The affordable bundle that yields the greatest satisfaction to the consumer. Figure 4-8 Page 128. * Consumer Equilibrium Consumer equilibrium: MRS = (Px / Py) MRS = marginal rate