1 Microeconomics Consumer Behavior Pertemuan ke-6-7 Consumer Behavior Pertemuan ke-6-7.

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Microeconomics

Consumer Behavior

Pertemuan ke-6-7

Consumer Behavior

Pertemuan ke-6-7

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Consumer Behavior• 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.

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?

3

Consumer Preferences

• A market basket is a collection of one or more commodities.

• One market basket may be preferred over another market basket containing a different combination of goods.

• Three Basic Assumptions

1) Preferences are complete (A to B, B to A or A>B, B>A)

2) Preferences are transitive (A to B to C, A>B>C)

3) Consumers always prefer more of any good to less. ( Semua barang baik)

Market BasketsMarket Baskets

4


A 20 30

B 10 50

D 40 20

E 30 40

G 10 20

H 10 40

Market Basket Units of Food Units of Clothing

5


• Indifference curves : semua kombinasi market basket yang memberikan tingkat kepuasan yang sama kepada seseorang tanpa peduli terhadap market basket pada titik manapun.

– Indifference curves slope downward to the right.• If it sloped upward it would violate the assumption that more of any commodity is

preferred to less.

Any market basket lying above and to the right of an indifference curve is preferred to any market basket that lies on the indifference curve.

• An indifference map is a set of indifference curves that describes a person’s preferences for all combinations of two commodities.

– Each indifference curve in the map shows the market baskets among which the person is indifferent.

• Indifference Curves– Finally, indifference curves cannot cross.

• This would violate the assumption that more is preferred to less.

Indifference CurvesIndifference Curves

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The consumer prefersA to all combinationsin the blue box, whileall those in the pink

box are preferred to A.


Food(units per week)

10

20

30

40

10 20 30 40

Clothing(units per week)

50

G

A

EH

B

D

7

U1

Combination B,A, & Dyield the same satisfaction•E is preferred to U1

•U1 is preferred to H & G



10

20

30

40

10 20 30 40


50

G

D

A

EH

B

8

U2

U3




U1

AB

D

Market basket Ais preferred to B.Market basket B ispreferred to D.

9

U1U2




A

D

B

The consumer shouldbe indifferent betweenA, B and D. However,B contains more ofboth goods than D.

Indifference CurvesCannot Cross

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Consumer Preferences• Ordinal Versus Cardinal Utility

– Ordinal Utility Function: places market baskets in the order of most preferred to least preferred, but it does not indicate how much one market basket is preferred to another.

– Cardinal Utility Function: utility function describing the extent to which one market basket is preferred to another.

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Consumer Preferences• Ordinal Versus Cardinal Rankings

– The actual unit of measurement for utility is not important.

– Therefore, an ordinal ranking is sufficient to explain how most individual decisions are made.

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• The marginal rate of substitution (MRS) quantifies the amount of one good a consumer will give up to obtain more of another good.

– It is measured by the slope of the indifference curve.

• We will now add a fourth assumption regarding consumer preference:

– Along an indifference curve there is a diminishing marginal rate of substitution.• Note the MRS for AB was 6, while that for DE was 2.

• Indifference curves are convex because as more of one good is consumed, a consumer would prefer to give up fewer units of a second good to get additional units of the first one.

• Consumers prefer a balanced market basket

• Perfect Substitutes and Perfect Complements– Two goods are perfect substitutes when the marginal rate of substitution of

one good for the other is constant.– Two goods are perfect complements when the indifference curves for the

goods are shaped as right angles.

Marginal Rate of SubstitutionMarginal Rate of Substitution

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Clothing(units

per week)

2 3 4 51

2

4

6

8

10

12

14

16 A

B

D

EG

-6

1

1

11

-4

-2-1

MRS = 6

MRS = 2

FCMRS

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Orange Juice(glasses)

Apple Juice

(glasses)

2 3 41

1

2

3

4

0

PerfectSubstitutes

PerfectSubstitutes

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Right Shoes

LeftShoes

2 3 41

1

2

3

4

0

PerfectComplements

PerfectComplements

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These consumers arewilling to give up

considerablestyling for additional

performance

Styling

Performance

ConsumerPreference A:

High MRS

ConsumerPreference A:

High MRS

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These consumers arewilling to give up

considerableperformance for additional styling

Styling

Performance

ConsumerPreference B:

Low MRS

ConsumerPreference B:

Low MRS

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Budget Constraints• Preferences do not explain all of consumer behavior.

• Budget constraints also limit an individual’s ability to consume in light of the prices they must pay for various goods and services.

• The Budget Line– The budget line indicates all combinations of two commodities for

which total money spent equals total income.

• The Budget Line– Let F equal the amount of food purchased, and C is the amount of

clothing.– Price of food = Pf and price of clothing = Pc

– Then Pf F is the amount of money spent on food, and Pc C is the amount of money spent on clothing.

ICPFP CF

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Budget Constraints

A 0 40 $80

B 20 30 $80

D 40 20 $80

E 60 10 $80

G 80 0 $80

Market Basket Food (F) Clothing (C) Total SpendingPf = ($1) Pc = ($2) PfF + PcC = I

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Budget Line F + 2C = $80

CF/PPFC - 2

1- / Slope

10

20

(I/PC) = 40

Budget Constraints

Food(units per week)40 60 80 = (I/PF)20

10

20

30

0

A

B

D

E

G

Clothing(units

per week)

Pc = $2 Pf = $1 I = $80

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Budget Constraints• The Effects of Changes in Income and Prices

– Income Changes• A decrease in income causes the budget line to shift inward, parallel

to the original line (holding prices constant).– Price Changes

• If the price of one good increases, the budget line shifts inward, pivoting from the other good’s intercept.

• If the price of one good decreases, the budget line shifts outward, pivoting from the other good’s intercept.

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Budget Constraints


Clothing(units

per week)

80 120 16040

20

40

60

80

0

A increase inincome shifts

the budget lineoutward

(I = $160)L2

(I = $80)

L1

L3

(I =$40)

A decrease inincome shifts

the budget lineinward

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Budget Constraints


Clothing(units

per week)

80 120 16040

40

(PF = 1)

L1

An increase in theprice of food to$2.00 changes

the slope of thebudget line and

rotates it inward.

L3

(PF = 2)(PF = 1/2)

L2

A decrease in theprice of food to$.50 changes

the slope of thebudget line and

rotates it outward.

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Consumer Choice

• Therefore, it can be said that satisfaction is maximized where:

C

F

P

PMRS

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Consumer Choice

• It can be said that satisfaction is maximized when marginal rate of substitution (of F and C) is equal to the ratio of the prices (of F and C).

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Consumer Choice

Food (units per week)

Clothing(units per

week)

40 8020

20

30

40

0

U1

B

Budget Line

Pc = $2 Pf = $1 I = $80

Point B does not maximize satisfaction

because theMRS (-(-10/10) = 1 is greater than the

price ratio (1/2).

-10C

+10F

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Consumer Choice

Budget Line

U3

D Market basket D cannot be attainedgiven the current

budget constraint.

Pc = $2 Pf = $1 I = $80


Clothing(units per

week)

40 8020

20

30

40

0

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U2

Consumer ChoicePc = $2 Pf = $1 I = $80

Budget Line

A

At market basket A the budget line and theindifference curve aretangent and no higherlevel of satisfaction

can be attained.

At A:MRS =Pf/Pc = .5


Clothing(units per

week)

40 8020

20

30

40

0

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Designing New Automobiles (II)

Styling

Performance$10,000

$10,000

$3,000

These consumersare willing to tradeoff a considerableamount of styling

for some additionalperformance

$7,000

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Pilihan (Choice) dan Utilitas • “Individu cenderung memilih barang yang nilainya

paling tinggi, maka individu akan melakukan pilihan-pilihan yang terbaik menurutnya”

• Dampak memilih barang yang memiliki nilai tinggi agar tingkat kepuasan individu tercapai (utilitas)

• Utility is the satisfaction, or reward, a product yields relative to its alternatives. The basis of choice.

• Marginal utility is the additional satisfaction gained by the consumption or use of one more unit of something.


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Consumer Choice

• A corner solution exists if a consumer buys in extremes, and buys all of one category of good and none of another. – This exists where the indifference curves are

tangent to the horizontal and vertical axis.– MRS is not equal to PA/PB

A Corner SolutionA Corner Solution

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A Corner Solution

Ice Cream (cup/month)

FrozenYogurt

(cupsmonthly)

B

A

U2 U3U1

A corner solutionexists at point B.

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Consumer Choice

• Suppose Jane Doe’s parents set up a trust fund for her college education.

• Originally, the money must be used for education.

• If part of the money could be used for the purchase of other goods, her consumption preferences change.

A College Trust FundA College Trust Fund

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The trust fund shifts the budget line

Consumer Choice

P

Q Education ($)

OtherConsumption

($)

U2

A College Trust FundA College Trust Fund

A

U1

A: Consumption before the trust fund

B

B: Requirement that the trust fund must be spent on education

C

U3 C: If the trust could be spent on other goods

35

Revealed Preferences• If we know the choices a consumer has

made, we can determine what her preferences are if we have information about a sufficient number of choices that are made when prices and incomes vary.

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B is preferred toall market baskets in the green area

Revealed Preferences--Two Budget Lines

l2

B

l1

D

A

All market basketsin the pink

shaded area are preferred to A.

Food (units per month)

Clothing(units per

month)

37

All market baskets in the pink area preferred to A

Food (units per month)

Revealed Preferences--Four Budget Lines

Clothing(units per

month)

l1

l2

l3

l4

A: preferred to allmarket baskets in the green area

E

B

A

G

I3: E revealed preferred to A

I4: G revealed preferred to A

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• Marginal utility measures the additional satisfaction obtained from consuming one additional unit of a good.

• Example– The marginal utility derived from increasing from 0 to

1 units of food might be 9– Increasing from 1 to 2 might be 7– Increasing from 2 to 3 might be 5

• Observation: Marginal utility is diminishing

Marginal Utility andConsumer Choice

Marginal UtilityMarginal Utility

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• The principle of diminishing marginal utility states that as more and more of a good is consumed, consuming additional amounts will yield smaller and smaller additions to utility.

Diminishing Marginal UtilityDiminishing Marginal Utility


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• Marginal Utility and the Indifference Curve– If consumption moves along an indifference

curve, the additional utility derived from an increase in the consumption one good, food (F), must balance the loss of utility from the decrease in the consumption in the other good, clothing (C).


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• Formally:

C)( MUF) (MU CF 0


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• Rearranging:


CF MUMUFC //

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• Because:

CF/MU MUMRS


CF MUMUFC //

C for F of MRSFC /

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• When consumers maximize satisfaction the:

CF/P PMRS

CFC F /P P /MUMU


• Since the MRS is also equal to the ratio of the marginal utilities of consuming F and C, it follows that:

45

• Which gives the equation for utility maximization:

CCFF PMUPMU //


46

• Total utility is maximized when the budget is allocated so that the marginal utility per dollar of expenditure is the same for each good.

• This is referred to as the equal marginal principle.


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• Nonprice rationing is an alternative to market rationing.

• Under one form everyone has an equal chance to purchase a rationed good.

• Gasoline is rationed by long lines at the gas pumps.

Gasoline RationingGasoline Rationing


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• Rationing hurts some by limiting the amount of gasoline they can buy.

• This can be seen in the following model.

• It applies to a woman with an annual income of $20,000.

• The horizontal axis shows her annual consumption of gasoline at $1/gallon.

• The vertical axis shows her remaining income after purchasing gasoline.


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B

20,000

A

Gasoline(gallons per year)

Spendingon othergoods ($) 20,000

5,000

U1

C15,000

2,000

D

With a limit of2,000 gallons,

the consumer movesto a lower

indifference curve(lower level of utility).

18,000

U2


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1 Microeconomics Consumer Behavior Pertemuan ke-6-7 Consumer Behavior Pertemuan ke-6-7.

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