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Week 2: Consumer Behaviour
(Ch 3)
Created @November 13, 2022 11:35 AM
Type Study notes
Questions
Reviewed
Consumer Behaviour
Understanding consumer purchasing decisions will help us to
understand how changes in income and prices affect the demand
for goods and services and why the demand for some products is
more sensitive than others to changes in prices and income
Consumer behaviour is understood in 3 steps
1. Consumer preferences
2. Budget constraints
3. Consumer choices
3.1 Consumer Preferences
Week 2: Consumer Behaviour (Ch 3) 1
, What is a market basket?
A list with specific quantities of one or more goods
What does the theory assume about consumers?
Consumers preferences are consistent and make sense
What are the three assumptions of consumer behaviour?
Completeness
Consumers are capable of comparing baskets and valuing them.
Either value A over B or be indifferent.
Transitivity
This means that, when a consumers prefers A over B and B over C, this
consumers also prefers A over C
Transitivity is normally regarded as necessary for consumer consistency
More is better than less
Consumers always prefer more of any good to less → consumers are never
satisfied or satiated
What is an indifference curve?
This curve displays all combinations of ‘market baskets’ to which consumers assign
equal value
Why does the curve move downwards?
The assumption that more is better than less would violated if the curve sloped
upwards
More is better than less, A is preferred over G whilst E is preferred over A. A cannot
be compared with B,D or H without additional information
Week 2: Consumer Behaviour (Ch 3) 2
, Where must a market basket lie in order to preferred to another?
Above and to the right of an indifference curve
Indifference Maps
The higher the indifference curve…
The higher the level the utility
Why can indifference curves not intersect?
It violates the assumption of transitivity and consumers would prefer less to more in
some cases which violates another assumption.
The shape of Indifference Curves
What does the shape of the indifference curve represent?
How a consumer is willing to substitute one good for another
The Marginal Rate of Substitution
What is the MRS?
Week 2: Consumer Behaviour (Ch 3) 3
Week 2: Consumer Behaviour
(Ch 3)
Created @November 13, 2022 11:35 AM
Type Study notes
Questions
Reviewed
Consumer Behaviour
Understanding consumer purchasing decisions will help us to
understand how changes in income and prices affect the demand
for goods and services and why the demand for some products is
more sensitive than others to changes in prices and income
Consumer behaviour is understood in 3 steps
1. Consumer preferences
2. Budget constraints
3. Consumer choices
3.1 Consumer Preferences
Week 2: Consumer Behaviour (Ch 3) 1
, What is a market basket?
A list with specific quantities of one or more goods
What does the theory assume about consumers?
Consumers preferences are consistent and make sense
What are the three assumptions of consumer behaviour?
Completeness
Consumers are capable of comparing baskets and valuing them.
Either value A over B or be indifferent.
Transitivity
This means that, when a consumers prefers A over B and B over C, this
consumers also prefers A over C
Transitivity is normally regarded as necessary for consumer consistency
More is better than less
Consumers always prefer more of any good to less → consumers are never
satisfied or satiated
What is an indifference curve?
This curve displays all combinations of ‘market baskets’ to which consumers assign
equal value
Why does the curve move downwards?
The assumption that more is better than less would violated if the curve sloped
upwards
More is better than less, A is preferred over G whilst E is preferred over A. A cannot
be compared with B,D or H without additional information
Week 2: Consumer Behaviour (Ch 3) 2
, Where must a market basket lie in order to preferred to another?
Above and to the right of an indifference curve
Indifference Maps
The higher the indifference curve…
The higher the level the utility
Why can indifference curves not intersect?
It violates the assumption of transitivity and consumers would prefer less to more in
some cases which violates another assumption.
The shape of Indifference Curves
What does the shape of the indifference curve represent?
How a consumer is willing to substitute one good for another
The Marginal Rate of Substitution
What is the MRS?
Week 2: Consumer Behaviour (Ch 3) 3
