Kinh tế vi mô FTU - Lecture 6 7

Lecture 6 and 7 The Theory of Consumer Choice Content Lecture 6 Theory of consumer utility The law of diminishing marginal utility Consumer preferences Lecture 7 The budget of the consumer Optimal consumption bundle Theory of consumer utility Utility (U) is an abstract measure of the satisfaction or happiness that a consumer receives from a bundle of goods. Consumer prefers one bundle of goods to another if one provides more utility than the other: U1 > U2 → Good 1 is preferred than good 2. Assumption: Transitivity: U1 > U2 > U3 → U1 > U3. More is preferred than less. Theory of consumer utility The marginal utility (MU) : is the increase in utility that the consumer gets from an additional unit of that good. MU = TU’(Q) = ∆TU/∆Q ∆TU : Increase in total utility ∆Q: Additional units of good Diminishing marginal utility: The more of the good the consumer already has, the lower the marginal utility provided by an extra unit of that good. Diminising marginal utility The Consumer’s preference A consumer’s preference among consumption bundles may be illustrated with indifference curves. An indifference curve is a curve that shows consumption bundles that give the consumer the same level of satisfaction. The consumer’s preferences allow him to choose among different bundles of pizza and Pepsi: If you offer the consumer two different bundles, he chooses the bundle that best suits his tastes. If the two bundles suit his tastes equally well, we say that the consumer is indifferent between the two bundles. PREFERENCES: WHAT THE CONSUMER WANTS A consumer’s preference among consumption bundles may be illustrated with indifference curves. An indifference curve is a curve that shows consumption bundles that give the consumer the same level of satisfaction. Figure The Consumer’s Preferences Quantity of Pepsi C B D I2 A 0 Indifference curve, I1 Quantity of Pizza Copyright©2004 South-Western