CH O I CE S M A D E B Y
H O U SE H O L D S A N D F I R M S
P E N D I D I K A N E K O N O M I F E - U N Y
2 0 12
1
Ekonom ika
Ekonom ika M ikr o
M ikr o
( PEK 411)
( PEK 411)
H ousehold Behavior and Consum er Choice
H ousehold Choice in
Output M ar kets
The Basis of Choice:
U tility
I ncom e and
Substitution Effects
The D eter m inants of H ousehold D em and
The price of the product
The incom e available to the household
The household's amount of accumulated wealth
The prices of other products available to the
household
The household's tastes and preferences
The Budget Constr aint
A consumer’s budget constraint identifies which
combinations of goods and service the consumer can
afford with a limited budget, at given prices.
Budget constraint: The different combinations of
Changes in The Budget Line
Change in I ncome
Consumer Decision: The M arginal Utility Approach... cont
M ar ginal U tility
( M U ) : The a dditiona l
satisfaction gained by the consum ption or use
of
one m or e
unit of a good or ser vice.
Total U tility ( TU ) : The total am ount of
satisfaction obtained fr om consum ption of a
good or ser vice.
Law of D im inishing M ar ginal U tility: The m or e
of any one good consum ed in a given per iod, the
less satisfaction ( utility) gener ated by
I NCOME AND SUBSTI TUTI ON EFFECTS
“Great news! Now that Pepsi is cheaper, my income has greater purchasing power. I am, in effect, richer than I was. Because I am richer, I can buy both more Pepsi and more pizza.” (This is the
income effect.)
The I ndifference Curve Approach
ASSU M PTI ON S
We assume that this analysis is restricted to goods that yield positive marginal utility, or, more simply, that "more is better.”
The m ar ginal r ate of substitution is defined as M UX/ M UY, or the ratio at which a household is willing to substitute X for Y.
We assume that consumers have the ability to choose among the combinations of goods and services available.
We assume that consumer choices are consistent with a simple
assumption of rationality. I f a consumer shows that he prefers A to B a nd subsequently show s tha t he prefers B to a thir d
I NCOME AND SUBSTI TUTI ON EFFECTS
“Great news! Now that Pepsi is cheaper, my income has greater purchasing power. I am, in effect, richer than I was. Because I am richer, I can buy both more Pepsi and more pizza.” (This is the
income effect.)
income effect: the change in consumption that r esults w hen a pr ice change moves the consumer to a higher or low er indiffer ence cur ve
“Now that the price of Pepsi has fallen, I get more pints of Pepsi for every pizza that I give up. Because pizza is now relatively more expensive, I should buy less pizza and more Pepsi.” (This is the substitution effect.)
A Giffen Good
A GIFFEN GOOD.
In this example, when the price of potatoes rises, the consumer’s optimum shifts from point C to point E. In this case, the
