Consumer Behaviour - Introduction to Microeconomics - Fall 2024 PDF

Concordia University, Edmonton, Alberta, Canada Introduction to Microeconomics ECO 101A Fall 2024 Dr. Ghada Mohamed’s Lectures [email protected] Room: NAB 252 on Monday @ (12:00 - 12:50), Wednesda...

Concordia University, Edmonton, Alberta, Canada Introduction to Microeconomics ECO 101A Fall 2024 Dr. Ghada Mohamed’s Lectures [email protected] Room: NAB 252 on Monday @ (12:00 - 12:50), Wednesday @ (12:00 - 12:50), Friday @ (12:00 - 12:50). Mid-term 1 to Mid-term 2: Section 2 Chapter 5 Elasticity October 14 Thanksgiving Day No Classes Chapter 7 Consumers and Producers Chapter 8 The Costs of Taxation Chapter 13 Production and Costs November 6 Term Exam 2 – Chapters 5, 6, 7, 8, 13 The Consumer Behavior Learning Objectives 1. The consumer’s problem. 2. The law of diminishing marginal utility and the optimal rule. 3. The rationale behind the demand curve. 4. Consumer surplus. 5. Price discrimination. 6. Link to elasticities. 7. Applications. The Consumer’s Problem. Under assumptions of rationality and non-satiation; a consumer behaves in general as follows; X𝑖 are goods and services the max U = f(X1, X2, X3, … Xn); consumer needs to consume; i is from 1 to n number of goods and services. Subject to; U is the total utility or the total the budget constraint satisfaction derived from consuming i goods and services. Other constraints. The total utility is a function of Xi. Yet for simplicity, we consider the following simple problem >>> The Consumer’s Problem. Assuming two goods only; X1 & X2 for simplicity. With the same assumptions of the rationality and the non-satiation. max U = f(X1, X2); Subject to; the budget constraint: M = Px1. Qx1 + Px2. QX2. Where; M is the total spending “the total budget the consumer is willing to spend, Px1 is the price of the X1, QX1 is the quantity the consumer is willing to consume of X1 , and Px2 is the price of the X2, QX2 is the quantity the consumer is willing to consume of X2. The optimal solution: Behavior optimization. max U = f(X1, X2); Subject to; the budget constraint: M = Px1. Qx1 + Px2. QX2. The consumer needs to maximize the utility derived from consuming those two goods by considering the budget constraint. The optimal solution captures this constrained goal. The optimal solution gives the optimal bundle that includes Q* X1 & Q*X2 this consumer buys. We call this “the consumer’s equilibrium”. The optimal quantity is translated to a purchase or to a demand. This is why each point along the demand curve a consumer’s equilibrium. Mathematical approach. Follow the lecture for the explanation. The mathematical solution will imply this optimal rule of this consumer’s equilibrium. (MUx1/ Px1) = (MUx2/ Px2). “the optimal rule or the equilibrium condition.” This implicit optimal rule will lead to the optimal bundle of (Q*X1, Q*X2). This optimal bundle is a point on the consumer’s demand curve. MUx1 is the marginal utility derived from consuming an additional unit of X1, and MUx2 is the marginal utility derived from consuming an additional unit of X2.  Economic Understanding and Analysis: The law of diminishing marginal utility. Consider the following exercise. “A one good model”: the good in question is X, where X is an ice cream cone. Qx TU MU 1 10 10 TU 2 18 8 3 24 6 MUx = 4 28 4 (∆𝑻𝑼𝒙/∆𝑸𝒙) 5 30 2 6 30 0 7 28 -2 QX When a consumer consumes more of the same good in MU the same period, the total utility derived from this consumption increases with each additional unit of consumption by diminishing rates until it reaches to its maximum, then it decreases. When the total utility increases in diminishing rates, its relevant marginal utility decreases. When the total utility reaches its maximum, the relevant marginal utility reaches zero. When the total QX utility decreases, the marginal utility becomes negative. Exercise. Upon understanding the law of diminishing marginal utility, complete the missing column in the following two tables. Qx TU MU Qx TU MU 1 9 1 20 2 5 2 38 3 1 3 44 4 0 4 48 5 50 6 50 7 45 MUx = (∆𝑻𝑼𝒙/∆𝑸𝒙)  Now; assuming a scenario of two goods; X1 & X2. Where; Px1 is the price/ unit of the good X1 and Px2 is the price/ unit of the good X2. Q MUx1 MUx2 MUx1/Px1 MUx2/Px2 The optimal rule that satisfies the 1 20 10 10 5 consumer’s equilibrium is; 2 16 8 8 4 3 12 6 6 3 (MUx1 / Px1) = (MUx2 / Px2). Assume that 4 8 4 4 2 Px1 is constant and equals $2/ unit of X1 and 5 4 2 2 1 Px2 is constant and equals $2/ unit of X2. 6 0 0 0 0 Assume that the total budget, M is only $12. This consumer needs to spend the entire 7 -4 -2 -2 -1 amount on both goods “today” in an optimal 8 -8 -4 -4 -2 way. Considering the following table, figure out the optimal bundle(Q*X1, Q*x2) this consumer will purchase. M =( PX1. QX1) + (PX2. QX2). 20 = (2. QX1) + (2. QX2) Solution: the consumer satisfies the optimal We need to get (Q*X1, Q*X2). rule and spends the whole amount when buying Q*X1 = 4 and Q*X2 = 2. Thus, the optimal bundle is ( 4 , 2 ). At (4, 2); 12 = 2(4) + 2(2) = 8 + 4 = 12. More understanding of the optimal purchase rule. A rational consumer buys a product that yields the highest marginal utility per dollar spent. If (MUX1 / PX1) > (MUX2 / PX2) , then the consumer consumes more of X1. If (MUX1 / PX1) < (MUX2 / PX2) , then the consumer consumes more of X2. The rationale behind the demand curve. Mathematically speaking; when; PX1 rises; the (MUX1/ PX1) term decreases. Ceteris Paribus. A rational consumer consumes less of X1. Link this logic to the substitution effect and the real income effect that explains the downward sloping demand curve. Follow the lecture for the explanations. Paradox of Value The Paradox of Value is resolved such that prices for goods are based on marginal utility rather than total utility. Example: Water gives us more total utility than diamonds (we need water to live), yet we are willing to pay a lot more for diamonds. This is because diamonds offer us a higher marginal utility (since there are very few diamonds in the world). “The assumption of the diminishing marginal utility is not valid with all scenarios in our life.” --- Open discussion. The Consumer Surplus (CS). P x c The difference between what a consumer is willing to pay and what a b he/she is actually paying. P0 The demand curve QDx Graphically speaking; the consumer surplus is the The consumer surplus is the area below the demand area of the triangle abc curve and above the = ((1/2)(b)).(h). price. Solve the following exercise >>> The Consumer Surplus (CS): Exercise. Px c Find the marginal consumer 50 surplus (MCS) at each quantity. 20 b For each quantity, the The demand curve vertical distance between the price line and the demand 0 1000 2000 3000 4000 QDx curve represents the marginal consumer surplus. The consumer surplus is the area of the triangle abc = ((1/2)(b)).(h) = Find the total consumer ((1/2)(4000))(30) = (2000)(30) surplus. >>> = $60000.  “The consumer surplus varies with elasticities.” Explain why and how. Follow the class for the explanation. Price Discrimination. Basis of practicing price discrimination. Meaning. Age, Gender, Time of purchase, The selling of an identical product at a Time of Use, and Volume of different price to different customers for purchases. reasons other than differences in the cost of production. Give graphical examples. How could be practiced? The seller identifies groups of customers with different demand elasticities. Follow the lecture for explanations. The seller separates the groups from one another. The seller ensures that those obtaining the lower prices cannot resell the product. Thank you ☺ The seller has control over the price.