Theory of Consumer Behavior

Section 4 †Theory of Consumer Behavior Economics 11 †UPLB Prepared by T. B. Paris, Jr. December 11, 2007 Theory of Consumer Behavior ? ? ? Valuable for understanding the interest side of the market. Utility †measure of fulfillment got from the utilization of an item †¦. estimation units ? utils Utility ideas ? ? cardinal utility †accept that we can dole out qualities for utility, (Jevons, Walras, and Marshall). E. g. , get 100 utils from eating a cut of pizza ordinal utility methodology †doesn't dole out qualities, rather works with a positioning of inclinations. Pareto, Hicks, Slutsky) Total utility and negligible utility ? ? Complete utility (TU) †the general degree of fulfillment got from devouring a decent or administration Marginal utility (MU) extra fulfillment that an individual gets from expending an extra unit of a decent or administration. ? TU MU = ? Q Total utility and minor utility Example (Table 4. 1): Q 0 1 2 3 4 5 6 7 TU 0 20 27 32 3 5 34 30 36 MU â€20 7 5 3 0 - 1 - 4 ? ? ? ? TU, when all is said in done, increments with Q sooner or later, TU can begin falling with Q see Q = 6) If TU is expanding, MU > 0 From Q = 1 onwards, MU is declining ? guideline of reducing minimal utility ? As increasingly more of a decent are expended, the procedure of utilization will (sooner or later) yield littler and littler augmentations to utility Total Utility Curve TU 35 Total utility(in utils) 30 25 20 15 10 5 0 1 2 3 4 5 Quantity 6 Q Figure 4. 1 Marginal Utility Curve MU Marginal utility (in utils) 20 15 10 5 0 - 5 Figure 4. 2 1 2 3 4 5 6 Quantity Q Consumer Equilibrium ? ?Up until this point, we have accepted that any measure of merchandise and ventures are consistently accessible for utilization as a general rule, shoppers face imperatives (salary and costs): Limited customers pay or financial plan ? Merchandise can be acquired at a cost ? Some disentangling suspicions ? ? ? ? Consumer’s objective: to augment his /her utility subject to pay requirement 2 merchandise (X, Y) Prices Px, Py are fixed Consumer’s salary (I) is given Consumer Equilibrium ? Minimal utility per peso ? extra utility got from spending the following peso on the great MU per peso = PConsumer Equilibrium ? Enhancing condition: MU X MU Y = PX PY ? In the event that MU X MU Y > PX PY ? spend more on great X and less of Y Simple Illustration ? Assume: X = fishball Y = siomai ? Accept: PX = 2 PY = 10 Numerical Illustration Qx 1 2 3 4 5 6 TUX 30 39 45 50 54 56 MUX 30 9 6 5 4 2 MUx Px 15 4. 5 3 2. 5 2 1 QY 1 2 3 4 5 6 TUY 50 105 148 178 198 213 MUY 50 55 43 30 20 15 MUy Py 5. 5 4. 3 2 1. 5 ? ? 2 potential ideal positions Combination A: ? X = 3 and Y = 4 ? TU = TUX + TUY = 45 + 178 = 223 ? Mix B: ? ? X = 5 and Y = 5 TU = TUX + TUY = 54 + 198 = 252 ? Nearness of 2 potential balance positions recommends that we have to think about salary. To do so let us analyze how much every customer spends for every blend. Consumption per blend ? ? All out consumption = PX X + PY Y Combination A: 3(2) + 4(10) = 46 ? Blend B: 5(2) + 5(10) = 60 ? Situations: If consumer’s pay = 46, at that point the ideal is given by mix A. .†¦Combination B isn't moderate ? In the event that the consumer’s pay = 60, at that point the ideal is given by Combination B†¦. Mix An is moderate however it yields a lower level of utility ? end