cx behaviour economics

1. BUSINESSECONOMICS

2. BUSINESSECONOMICS
• CONSUMEREQUILIBRIUM
• INDIFFERENCECURVEAPPROACH
• THEORYOF REVEALEDPREFERENCES

3. CONSUMER EQUILIBRIUM
• "The term consumer’s equilibriumrefers tothe amount ofgoods andservices which the consumer may buy in the market
given his income andgiven prices of goodsin the market".
• The aim of the consumer is toget maximum satisfaction fromhis money income. Given the priceline or budgetline and
the indifference map {MU=price}

4. Amt. Spent on
goods(Rs)
Price/Y good Price/ X good Total Units
Rs 4 0.50 8 units
Rs 4 0.25 16 units
Rs 2 0.50 4 units
Rs 2 0.25 8 units
Ic2
Ic3
Ic4
Ic1
equilibrium
ConsumerEquilibrium

5. AssumptionsTo Equilibrium Of TheConsumer
o The consumerhasIndifference Mapofgood X andGood Y
o The consumerhaveafixed moneyincomewhicharespendon X andY
o ThePrices of goodX –PxandgoodY– Pyaregiven
o Goodarehomogenous
o MRSxy= Y/ X=Px/Py

6. INDIFFERENCECUVREAPPROACH
Indifferencecurve:showsdifferentcombinationsoftwogoodsthatgivesequalsatisfactiontotheconsumerandconsumerisindifferentinthe
choice ofmatterbetweenthem. isa linejoiningallthepoints(representingdifferentbasketsofgoods)givingthe sameutilitytoan individual
Definition
Koutsoyiannis,“Anindifferencecurveisthelocusofpointparticularcombinationofgoods,whichyieldthesameutilitytotheconsumer,so thathe
isindifferentastotheparticularcombinationheconsumes.”
ICschedule:representsdiff.combinationoftwo goodsX,Ywhichyieldsamelevelofsatisfaction
ICschedule
ICCurvePoints on IC Y goods X goods
A 15 2
B 10 4
C 5 6

7. It consistofset ofindifferencecurves.Adiagramshowinganumberofindifferentcurvescorresponding
todifferentindifferenceschedulesisanindifferencemap.AlowerICshowslowerlevel of
satisfaction.
Y
YCommodity
XO X Commodity
IC1
IC2
IC3

8. Budget Line
• It is also called IncomeLine. Itrepresents maximum quantities of the goods x and ythat can be purchased at a
given level of income and price.
Equationofbudgetline:
X  PX + Y  PY = I
Expenditure on
good X
Expenditure on
good Y
Money income of
the consumer

9. X
Y
MRS



Marginal Rate of Substitution
Therateat which theconsumer is preparedto exchangegoods X and Y is knownas marginalrateof substitution.
Or
Wemaydefinethemarginalrateofsubstitution ofX forYas theamountofYwhoseloss canjustcompensate the
consumerforoneunitgaininX.
There aretwo reasons:First, thewantfor aparticulargood is satiable
Second, thegoods areimperfect substitutes
Is the maximum amountofgoodY that an individual is willingtoforgofor anadditionalunit ofgoodX.
Points on IC Y goods X goods
A 15 2
B 10 4
C 5 6

10. PROPERTIES OF IC CURVES
Property 1. IC’s slopes downward to the right
IC Can’t be:
Y
X
IC
Ycommodity
O X commodity
Y
X
Y
X
Y
XO O O

11. Property2:ICareconvextotheorigin
Can’tbe
IC
O a a1 a2 a3 X
X Commodity
Y
b
b1
b2
b3
YCommodity

12. Property3.ICcan’tIntersect andtoucheachother
Property4.AhigherICshowhigherlevelofSatisfaction
C
A
B
O M N X
X Commodity
Y
S
R
Q
Ycommodity
A B
C
O a1 X
X commodity
Y
B1
B2
E
E1Ygood

13. Property 5: ICneednotbeparalleltoeachother
Property6: ICdonottoucheitherX-axisorYaxis
Y
O X good X
IC3
IC2
IC2
Y
Ygood
O X Good
X

14. IC in case of Substitute
IC in case of complimentary goods
X good
Ygood
IC1
IC2
X good
Ygood
IC2
IC1

15. Assumptions ofIC’s
• RationalConsumer
• OrdinalUtility
• DiminishingMarginalRate of Substitution
• Two Goods Model
• Continuity
• Scale of Preference
• Transitivity
• Consistency inSelection
• NonSatiety
• WeakOrdering

16. Price-consumption Curve:
connectspoints of equal utility on budget lines formedby changingprices
Income-consumption Curve:
connectspoints of equal utility on budget lines formedby changingincome
"Engel's Curve"
a general reference tothe line which shows the relationship between various quantities ofa
gooda consumer is willing topurchase at varyingincome levels (ceteris paribus).
Engel’s Curve

17. Px One will buymoregood X tosubstitute good Y
S.E.
L3
X3
E3

Y
0 X

E1
L1
X1
So substitution effect must be negative.
Substitution Effect is thechange inthe quantity demanded of a good caused by a changein its price, holdingutilityorreal
incomeconstant.
Newequilibrium
L2

18. I.E.

L2
X2
Y
0
X
S.E.

E3
E1
L1
L3
X3X1
Usingthesaved
income
The saved income will raisethe consumption ofgoodX
if goodX is asuperior good.E2

IncomeEffect is thechange inthe quantity demandedof a good as a result of a change inrealincomecaused by a change
inits price.
When Px,income is saved. Income is further saved by the S.E. as the
consumption ofan expensive goodis substituted bythe consumption of a
cheaper good.

19.  Indifference curves analysis had limitations in terms of its highly theoretical structure and simplifying
assumptions.
 Samuelson came up with an approach to assessing consumer behaviour and introduced the term ‘revealed
preference’.
 Thebasic hypothesis of the theory is ‘choicereveals preference’.
 Demand for a commodity by a consumer can be ascertained by observing the actual behaviour of the
consumerin the marketinvarious price and incomesituations.
 This gives us a demand curvefor anindividual consumeron the basis of observed behaviour.
Revealed Preference Theory

20. Revealed PreferenceTheory
 AB is the budget line.OAB is the feasible set, given the price and incomeconstraints for two goods M and N.
 If out of all the possible combinations of two goods M and N, the consumers chooses C, it may be deduced that
the consumerhas revealed his/herpreference for C over all other possible combinations (say D, L, R).
A
B QuantityofM
QuantityofN
O
D
L
R
B’
N
M
C
A1
B1
C’
 Demand increases when price falls money
income remainingsame and vice versa.
 Fall in price of M will shift the budget line to
AB’.
 New preferencewill be at C’
 Remaining on the same point C will imply a
fall in income (budget line) to A1B1

21. Summary
Indifferencecurvesare downward sloping and convex to the origin; a higherindifference curvewould represent higher
utility and two indifference curvesdo not intersect each other
Marginal Rateof Substitution (MRS) shows theamount of a good that a consumer would be willing to give up for an
additional unitof anothercommodity.
Budget constraint to the consumerincludes incomeof the consumerand prices of thecommodities in the
consumption basket. A changein anyof these constraints would lead to a shift in the budget line. Such a shift can beof
threetypes: upwards, downwards and swivelling.
Theconsumerwill beat equilibriumat a point wherethe budget lineis tangent to the highest attainable indifference
curve.
Accordingto the theoryof revealedpreferences, demand for a commodity by a consumercan be ascertained by
observing the buyingpattern of the consumer.

22. PresentedBy:
YankatNaik
RobleKoshy
VSiddharth
DesignedBy:
VSiddharth
ReferencesFrom:
Wikipedia
Xavier’sPrescribedBook