Lesson 04 - The Theory of Individual Behavior.pptx

General Sir John Kotelawala Defence University, Sri Lanka Business Economics R. K. Kasunthika PHD (Reading), MBM (UoK), B.Sc (USJ), SLIM Bachelor of Science in Applied Data Science Communication, Batch 41 1 ...

General Sir John Kotelawala Defence University, Sri Lanka Business Economics R. K. Kasunthika PHD (Reading), MBM (UoK), B.Sc (USJ), SLIM Bachelor of Science in Applied Data Science Communication, Batch 41 1  The Theory of Individual Behavior Lesson 04 Bachelor of Science in Applied Data Science Communication, Batch 41 2 Consumer Behavior A consumer is an individual who purchases goods and services from firms for the purpose of consumption. Consumer Opportunities represent the possible goods and services consumers can afford to consume. Consumer preferences determine which of these goods will be consumed. Bachelor of Science in Applied Data Science Communication, Batch 41 3 The Assumption of Indifference Curve Completeness More is better Diminishing marginal rate of substitution Transitivity Bachelor of Science in Applied Data Science Communication, Batch 41 4 Indifference Curve A curve that defines the combinations of two goods that give a consumer the same level of satisfaction. Bachelor of Science in Applied Data Science Communication, Batch 41 5 Marginal Rate of Substitution The rate at which a consumer is willing to substitute one good for another good and still maintain the same level of satisfaction. Bachelor of Science in Applied Data Science Communication, Batch 41 6 A Family of Indifference Curves Curves are convex. Don’t cross. Curves farther from the origin imply higher levels of satisfaction than curves closer to the origin. Bachelor of Science in Applied Data Science Communication, Batch 41 7 Constraints The budget constraints Budget set: The bundles of goods a consumer can afford. Budget line: The bundles of goods that exhaust a consumer’s income. Bachelor of Science in Applied Data Science Communication, Batch 41 8 Constraints Changes in income The consumer’s opportunity set depends on market prices and the consumer’s income. As these parameters change, so will the consumer’s opportunities. Bachelor of Science in Applied Data Science Communication, Batch 41 9 Constraints Changes in prices Now suppose the consumer’s income remains fixed at M, but the price of good X decreased. Furthermore, suppose the price of good Y remains unchanged. Bachelor of Science in Applied Data Science Communication, Batch 41 10 Demonstrate Problem A consumer has an initial income of $100 and faces prices of Px = $1 and Py = $5. Graph the budget line,and show how it changes when the price of good X increases to Px 1 = $5. Bachelor of Science in Applied Data Science Communication, Batch 41 11 Consumer Equilibrium The equilibrium consumption bundle is the affordable bundle that yields the greatest satisfaction to the consumer. Bachelor of Science in Applied Data Science Communication, Batch 41 12 Comparative Statistics Price changes and consumer behavior A change in the price of a good will lead to a change in the equilibrium consumption bundle. Change in consumer equilibrium due to a decrease in the Price of Good X (Note that good Y is a substitute for X.) Bachelor of Science in Applied Data Science Communication, Batch 41 13 Comparative Statistics A change in the price of a good will lead to a change in the equilibrium consumption bundle. When the Price of good X falls, the consumption of complementary Good Y Rises. Bachelor of Science in Applied Data Science Communication, Batch 41 14 Comparative Statistics Income changes and consumer behavior A change in income also will lead to a change in the consumption patterns of consumers. The reason is that changes in income either expand or contract the consumer’s budget constraint, and the consumer therefore finds it optimal to choose a new equilibrium bundle. An Increase in Income Increases the Consumption of Normal Goods Bachelor of Science in Applied Data Science Communication, Batch 41 15 Comparative Statistics Income changes and consumer behavior An Increase in Income Decreases the Equilibrium Consumption of Good X—An Inferior Good Bachelor of Science in Applied Data Science Communication, Batch 41 16 Substitution and income effects Substitution effect The movement along a given indifference curve that results from a change in the relative prices of goods, holding real income constant. Income effect The movement from one indifference curve to another that results from the change in real income caused by a price change. Bachelor of Science in Applied Data Science Communication, Batch 41 17 Substitution and income effects An Increase in the Price of Good X Leads to a Substitution Effect (A to B) and an Income Effect (B to C) Bachelor of Science in Applied Data Science Communication, Batch 41 18 Application of Indifference Curve Analysis Buy one, get one free Bachelor of Science in Applied Data Science Communication, Batch 41 19 Application of Indifference Curve Analysis Cash Gifts, In-Kind Gifts, and Gift Cards Bachelor of Science in Applied Data Science Communication, Batch 41 20 Application of Indifference Curve Analysis Choices by workers, and managers Bachelor of Science in Applied Data Science Communication, Batch 41 21 Demonstrate problem Suppose a worker is offered a wage of $5 per hour, plus a fixed payment of $40. What is the equation for the worker’s opportunity set in a given 24-hour day? Bachelor of Science in Applied Data Science Communication, Batch 41 22  The Relationship between Indifference Curve Analysis and Demand Curves Individual Demand Bachelor of Science in Applied Data Science Communication, Batch 41 23  The Relationship between Indifference Curve Analysis and Demand Curves Market Demand Bachelor of Science in Applied Data Science Communication, Batch 41 24  Questions and Discussions Thank You… Bachelor of Science in Applied Data Science Communication, Batch 41 25