MANAGERIAL ECONOMICS 11th Edition - ….pptVIP

ECONOMICSFOR MANAGERS By Mark Hirschey Consumer Behavior Chapter 4 Chapter 4OVERVIEW Utility Theory Indifference Curves Budget Constraints Individual Demand Demand Curves and Consumer Surplus Consumer Choice Optimal Consumption Chapter 4KEY CONCEPTS utility nonsatiation principle indifference ordinal utility cardinal utility utility function utils market baskets marginal utility law of diminishing marginal utility indifference curves substitutes complements perfect substitutes perfect complements budget constraint income effect substitution effect price-consumption curve income-consumption curve Engle curve normal goods inferior goods consumer surplus two-part pricing bundle pricing optimal market basket revealed preference marginal rate of substitution consumption path Utility Theory Assumptions About Consumer Preferences More is better. Consumers can rank preferences. Consumers ran-order desirability of products. Utility Functions Descriptive statement relates well-being and consumption. Marginal Utility Added benefit is focus of consumers. Law of Diminishing Marginal Utility Marginal utility eventually declines for everything. Indifference Curves Basic Characteristics of Indifference Curves Higher indifference curves are better. Indifference curves do not intersect. Indifference curves slope downward. Indifference curves are concave to origin. Perfect Substitutes and Perfect Complements Perfect substitutes satisfy the same need. Perfect complements are consumed together. Budget Constraints Basic Characteristics of Budget Constraints Shows affordable combinations of X and Y. Slope of –PX/PY reflects relative prices. Effects of Changing Income and Changing Prices Budget increase causes parallel outward shift. Budget decrease causes parallel inward shift. Income and Substitution Effects Income (substitution) effect is change in overall (relative) consumption. Individual Demand Price-consumption Curve Shows how consumption is affected by price changes (movem