MANAGERIAL ECONOMICS 11 th Edition

1. MANAGERIAL ECONOMICS 11th Edition By Mark Hirschey

2. Consumer Demand Chapter 4

3. Chapter 4OVERVIEW • Utility Theory • Indifference Curves • Budget Constraints • Individual Demand • Demand Curves and Consumer Surplus • Consumer Choice • Optimal Consumption

4. 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 Chapter 4KEY CONCEPTS

5. 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.

7. 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.

9. 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.

11. Individual Demand • Price-consumption Curve • Shows how consumption is affected by price changes (movement along demand curve). • Income-consumption Curve • Shows how consumption is affected by income changes (shifts from one demand curve to another). • Engle Curves • Plot between income and quantity consumed. • Consumption of normal goods rises with income. • Consumption of inferior goods falls with income (rare).

14. Demand Curves and Consumer Surplus • Graphing the Demand Curve • Demand curves always slope downward. • Consumer Surplus • Value received above amount paid. • Consumer Surplus and Two-Part Pricing: An Illustration • Membership fees and user fees extract consumer surplus for the seller. • Consumer Surplus and Bundle Pricing • Bundle pricing extracts consumer surplus for sellers.

16. Consumer Choice • Marginal Utility and Consumer Choice • Optimal consumption maximizes utility. • Optimal consumption reflects marginal utility (benefits) and marginal costs. • Revealed Preference • Documented desire. • Buyer decisions can be used to infer consumer preferences.

17. Optimal Consumption • Marginal Rate of Substitution (MRS) • MRSXY = -MUX/MUY and equals indifference curve slope. • MRSXY shows tradeoff in the amount of X and Y consumed, holding utility constant. • MRSXY diminishes as amount of substitution of X for Y increases. • Utility Maximization • Optimality requires PX/PY = MUX/MUY. • Optimality requires MUX/PX = MUY/PY.