Summary
Summary chapter 4- the theory of individual behavior
- Course
- Managerial Economics
- Institution
- Azad University
Summary Managerial Economics & Business Strategy, ISBN: 0619 Managerial Economics-chapter 4
[Show more]
Connected book
Book Title:
Author(s):
- Edition:
- ISBN:
- Edition:
Seller
Follow
Content preview
Chapter 4: The Theory of Individual BehaviorConsumer – an individual who purchases goods and services from firms for the purpose of
consumption.
Two distinct factors to consider while characterizing consumer behavior:
1. Consumer opportunities represent the possible goods and services consumers can
afford.
2. Consumer preferences determine which of the affordable goods will be consumed.
If you would like to make a model of behavior, you should start with a simple model, i.e.
assuming only two goods exist in our economy.
The preference ordering between two goods is assumed to satisfy 4 basic properties;
1. Completeness – Consumer is capable of expressing a preference for, or indifference
among, all bundles. For two bundles A and B: Either A>B, B>A or A~B.
2. More is better – For two bundles A and B: if bundle A has at least as much of every
good as bundle B and more of some good, bundle A is preferred over bundle B.
3. Diminishing marginal rate of substitution – As a consumer obtains more of good A,
the rate at which he or she is willing to substitute good A for good B decreases.
4. Transitivity – The assumption of transitive preferences implies that indifference curves
do not intersect one another. This eliminates the possibility that the consumer is caught in
a perpetual cycle in which he or she never makes a choice. For three bundles A, B and C:
if A>B and B>C, then A>C. Similarly, if A ~ B and B ~ C, then A ~ C.
Indifference curve – A curve that defines the combinations of two or more goods that give a
consumer the same level of satisfaction. Curves farther from the origin imply higher levels of
satisfaction than curves closer to the origin.
Marginal rate of substitution (MRS) – The rate at which a consumer is willing to substitute
one good for another good and still maintain the same level of satisfaction. The marginal rate of
substitution is the slope of the indifference curve.
Constraints – people have a certain limits; legal, time, physical and budget constraints.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller alikarimi. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for CA$9.74. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
81531 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now