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Topic 1

Consumer Behavior

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Topics to be Discussed

 Budget constraints

 Consumer preferences

 The utility function

 Consumer choice

 Price and income changes

 Substitutes and complements

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Introduction

 How are consumer preferences used to

determine demand?

 How do consumers allocate income to

the purchase of different goods?

 How do consumers with limited income

decide what to buy?

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Consumer Behavior

 The theory of consumer behavior can be

used to help answer these and many

more questions

 Theory of consumer behavior



The explanation of how consumers allocate

income to the purchase of different goods

and services

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Consumer Behavior

 There are three steps involved in the

study of consumer behavior

1. Consumer Preferences



To describe how and why people prefer

one good to another

1. Budget Constraints



People have limited incomes

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Consumer Behavior

3. Given preferences and limited incomes,

what amount and type of goods will be

purchased?



What combination of goods will consumers

buy to maximize their satisfaction?

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Consumer Preferences

 How might a consumer compare different

groups of items available for purchase?

 A market basket is a collection of one or

more commodities

 Individuals can choose between market

baskets containing different goods

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Consumer Preferences – Basic

Assumptions

1. Preferences are complete



Consumers can rank market baskets

1. Preferences are transitive



If they prefer A to B, and B to C, they must

prefer A to C

1. Consumers always prefer more of any

good to less



More is better

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Consumer Preferences

 Consumer preferences can be

represented graphically using

indifference curves

 Indifference curves represent all

combinations of market baskets that the

person is indifferent to



A person will be equally satisfied with either

choice

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Indifference Curves:

An Example...