Essay about Managerial Economics & Business Strategy Chapter 4

1531 Words Sep 10th, 2012 7 Pages
Managerial Economics & Business Strategy Chapter 4
The Theory of Individual Behavior

Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008

Overview
I. Consumer Behavior
Indifference Curve Analysis Consumer Preference Ordering

II. Constraints
The Budget Constraint Changes in Income Changes in Prices

III. Consumer Equilibrium IV. Indifference Curve Analysis & Demand Curves
Individual Demand Market Demand
Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008

Consumer Behavior
• Consumer Opportunities
The possible goods and services consumer can afford to consume.

• Consumer Preferences
The goods and services
…show more content…
• the consumer will not get caught in a perpetual cycle of indecision.

1

2

5

7 Good X

Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008

The Budget Constraint
• Opportunity Set
The set of consumption bundles that are affordable. • PxX + PyY ≤ M.
Y
The Opportunity Set Budget Line
M/PY

Y = M/PY – (PX/PY)X

• Budget Line
The bundles of goods that exhaust a consumers income.

• PxX + PyY = M.

• Market Rate of Substitution
The slope of the budget line • -Px / Py
Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008

M/PX

X

Changes in the Budget Line
Y

• Changes in Income
Increases lead to a parallel, outward shift in the budget line (M1 > M0). Decreases lead to a parallel, downward shift (M2 < M0).

M1/PY

M0/PY

M2/PY

• Changes in Price

A decreases in the price of good X rotates the budget M0/PY line counter-clockwise (PX > 0 PX ). 1 An increases rotates the budget line clockwise (not shown).

Y

M2/PX

M0/PX

M1/PX

X

New Budget Line for a price decrease.

Michael R. Baye, Managerial Economics and Business Strategy, 6e. ©The McGraw-Hill Companies, Inc., 2008

M0/PX

0

M0/PX

X

1

Consumer Equilibrium
• The equilibrium consumption bundle is the affordable bundle that yields the highest level of satisfaction.
Consumer equilibrium occurs at a point

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