Copyright 2002, Pearson Education Canada1 Household Behavior and Consumer Choice Chapter 6.
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Transcript of Household Behavior and
Household Behavior and
6 Household Behavior and Consumer Choice In chapter four, we
consider the various options that are available for organizing a
business.The organization of a business is very important as it
affects how it operates, how much tax it pays, and how much control
the owners have.We will consider the primary forms of business
ownership that include sole proprietorship, partnerships, and
corporations.In addition, the advantages and disadvantages of each
form of organization will be discussed. 4-2 Household Behavior and
Consumer Choice
Programs and policies can enhance and support an organizations
culture. Household Choice in Output Markets
Every household must make three basic decisions: How much of each
product, or output, to demand 2. How much labor to supply 3. How
much to spend today and how much to save for the future Programs
and policies can enhance and support an organizations culture. The
Determinants of Household Demand (as seen in chapter 3)
Factors that influence the quantity of a given good or service
demandedby a single household include: The price of the product in
question. The income available to the household. The households
amount of accumulated wealth. The prices of related products
available to the household. The households tastes and preferences.
The households expectations about future income, wealth, andprices.
Programs and policies can enhance and support an organizations
culture. THE BUDGET CONSTRAINT This is the budget constraint when
income equals $100 dollars per month, the price of movies is $10
each, and the price of a books is $ 5. If we spent all of our money
on books, we could consume at point A. In order to see two movies,
which cost a total of $20, you will only have $80 to spend on
books, allowing you to buy a maximum of 16 books. This combination
is point B. If you were to spend all of your money going to the
movies, you could see 10 movies (ispoint C). The combination of
these points makes up thebudget constraint. All the points under
(and including) the budget constraint are called the opportunity
set orchoice set. Programs and policies can enhance and support an
organizations culture. choice set or opportunity set
THE BUDGET CONSTRAINT budget constraint The limits imposed on
household choices by income, wealth, and product prices. A choice
set or opportunity set is the set of options that is defined by a
budget constraint. Programs and policies can enhance and support an
organizations culture. THE BUDGET CONSTRAINT More Formally
Point E is unattainable given the current income prices. Point D
does not exhaust the entire income available. Programs and policies
can enhance and support an organizations culture. PXX + PYY = I,
THE EQUATION OF THE BUDGET CONSTRAINT
In general, the budget constraint can be written: Where PX = the
price of X, X = the quantity of X consumed, PY = the price of Y, Y
= the quantity of Y consumed, I = household income. PXX + PYY = I,
Programs and policies can enhance and support an organizations
culture. THE BASIS OF CHOICE: UTILITY
The satisfaction, or reward, a product yields relative to its
alternatives. The basis of choice. a numerical indicator of a
persons preferences in which higher levels of utility indicate a
greater preference. Programs and policies can enhance and support
an organizations culture. THE BASIS OF CHOICE: UTILITY
marginal utility (MU) The additional satisfaction gained by the
consumption or use of one more unit of something. total utility The
total amount of satisfaction obtained from consumption of a good or
service. Marginal utility comes only from the last unit consumed;
total utility comes from all units consumed. When marginal utility
is zero, total utility stops rising. Programs and policies can
enhance and support an organizations culture. Diminishing Marginal
Utility and Downward-Sloping Demand
law of diminishing marginal utility The more of any one good
consumed in a given period, the less satisfaction (utility)
generated by consuming each additional (marginal) unit of the same
good. Diminishing marginal utility helps to explain why demand
slopes down. Marginal utility falls with each additional unit
consumed, so people are not willing to pay as much. Programs and
policies can enhance and support an organizations culture. Income
and Substitution Effects
Price changes affect households in two ways: The income effect:
Consumption changes because purchasing power changes. The
substitution effect: Consumption changes because opportunity costs
change. Programs and policies can enhance and support an
organizations culture. Income and Substitution Effects Of A Price
Change (For Normal Goods)
Income effect: When the price of a product falls, a consumer has
more purchasing power with the same amount of income. When the
price of a product rises, a consumer has less purchasing power with
the same amount of income. Substitution effect: When the price of a
product falls, that product becomes more attractive relative to
potential substitutes. When the price of a product rises, that
product becomes less attractive relative to potential substitutes.
Programs and policies can enhance and support an organizations
culture. Income and Substitution Effects Of A Price Change (For
Normal Goods)
Programs and policies can enhance and support an organizations
culture. The Diamond/Water Paradox
Water is plentiful. If the price of water was zero, you might argue
that water has no value.But it does.Consumers enjoy a huge consumer
surplus from water consumption. Household willingness to pay far
exceeds the zero price. Programs and policies can enhance and
support an organizations culture. The Diamond/Water Paradox
The lesson of the diamond/water paradox is that: the things with
the greatest value in use frequently have little or no value in
exchange, and the things with the greatest value in exchange
frequently have little or no value in use. Programs and policies
can enhance and support an organizations culture. Household Choice
in Input Markets
As in output markets, households face constrained choices in input
markets.They must decide: Whether to work How much to work What
kind of a job to work at These decisions are affected by: The
availability of jobs Market wage rates The skill possessed by the
household Programs and policies can enhance and support an
organizations culture. Household Choice in Input Markets
Programs and policies can enhance and support an organizations
culture. The wage rate can be thought of as the priceor the
opportunity costof the benefits of either unpaid work or leisure.
Household Choice in Input Markets
INCOME AND SUBSTITUTION EFFECTS OF A WAGE CHANGE labor supply curve
A diagram that shows the quantity of labor supplied at different
wage rates.Its shape depends on how households react to changes in
the wage rate. Programs and policies can enhance and support an
organizations culture. Household Choice in Input Markets
INCOME AND SUBSTITUTION EFFECTS OF A WAGE CHANGE An increase in the
wage rate affects households in two ways, known as the substitution
and income effects. The substitution effect of a higher wage means
that the opportunity cost of leisure is higher.The household will
buy less leisure (supply more labor). When the substitution effect
outweighs the income effect, the labor supply curve slopes upward.
Programs and policies can enhance and support an organizations
culture. Household Choice in Input Markets
INCOME AND SUBSTITUTION EFFECTS OF A WAGE CHANGE An increase in the
wage rate affects households in two ways, known as the substitution
and income effects. The income effect of a higher wage means that
households can afford to buy more leisure (offer less labor). When
the income effect outweighs the substitution effect, the result is
a backward-bending labor supply curve. Programs and policies can
enhance and support an organizations culture. REVIEW TERMS AND
CONCEPTS
budget constraint choice set or opportunity set consumer surplus
diamond/water paradox homogeneous products income effect of a price
change labor supply curve law of diminishing marginal utility
marginal utility (MU) real income substitution effect of a price
change total utility utility Programs and policies can enhance and
support an organizations culture.