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Module No. 2 Lesson 1 ABM112

This module introduces tools to help managers understand individual consumer behavior, such as how preferences and budget constraints determine consumption choices. It discusses indifference curves and how shifts in prices and income affect demand. Managers can use this framework to analyze how promotional deals like "buy one, get one free" impact purchase decisions. The module aims to provide managers a basic model for understanding individual decision-making in the marketplace.

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92 views10 pages

Module No. 2 Lesson 1 ABM112

This module introduces tools to help managers understand individual consumer behavior, such as how preferences and budget constraints determine consumption choices. It discusses indifference curves and how shifts in prices and income affect demand. Managers can use this framework to analyze how promotional deals like "buy one, get one free" impact purchase decisions. The module aims to provide managers a basic model for understanding individual decision-making in the marketplace.

Uploaded by

Rush Rush
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Module No.

and MODULE 3 - The Theory of Individual


Title Behavior

Lesson 1 The Theory of Individual Behavior

a. Consumer behavior
b. Constraints
c. Comparative Statistics
d. Application of Indifference Curve
Lesson No. and e. Relationship between Indifference Curve Analysis and
Title Demand Curves
f. Separate the impact os a price change into substitution
and income effects.
g. Illustrate how “buy one, get one free” deals and gift
certificates impact a consumer’s purchase decisions.

This chapter develops tools that help a manager understand


the bahavior of individuals, such as consumers and workers,
and the impact of alternative incentives on their decisions.
Despite the complexities of human thought processes,
Introduction
managers need a model that explains how individuals behave
in the marketplace and in the work environment. Life would be
simpler for managers of firms if the behavior of individulas
were not so complicated.

 Illustrate how changes in prices and income impact an


individual’s opportunities.
Learning Outcomes  Separate the impact os a price change into substitution and
income effects.
 Illustrate how “buy one, get one free” deals and gift
certificates impact a consumer’s purchase decisions.
Time Frame The lesson will take you about 3 hours and a half to complete.
Activity

Direction. Write your answer in the box.

Consumer Behavior

1.As a consumer, what are the factors you considered in choosing a product.

Analysis

1.As a consumer, what are your preference when buying a product?

2.Do you believe that budget is the most common constraint to consumers? Explain.
Abstraction

Consumer is an individual who purchases goods and services from firms for the
purpose of consumption. As a manager of a firm, you are interested not only in who
consumes the good but in who purchases it.
In characterizing consumer behavior, two factors are to be considered:
a. Consumer Opportunities
Represent the possible goods and services consumers can afford to
consume.
b. Consumer Preferences
It determine which of these goods will be consumed.
Four basic preference properties
 Completeness. The consumer is capable of expressing a preference for, or
indefferences among, all bundles.
(Bundle A and B – either A>B, B>A, or A~B.)
 More is better. The consumer views the products under consideration as “goods”
instead of “bads”.
(If bundle A has at least as much of every good as bundle B and more of some
good, bundle A is preferred to bundle B.)

 Indifference curve defines the combination of Goods X and Y that give the
consumer the same level of satisfaction.

 Marginal rate of substitution (MRS) is the absolute value of the slope of


substitution. It is the rate at which a consumer is willing to substitute one good for
the other and still maintain the same level of satisfaction.

 Diminishing marginal rate of substitution


(Consumer obtains more of good A, the amount of good B he is willing to give up
to obtain another unit of good A decreases.)

 Transivity
(A is preferred to B, and B is preferred to C, so A is preferred to C.)

Constraints
In making decisions, individuals face constraints. There are legal constraints, time
constraints, physical constraints and budget constraints.
The Budget Constraints
Simply stated, it restricts consumer behavior by forcing the consumer to select a bundle
of goods that is affordable.
Budget set is the bundles of goods a consumer can afford. Consider the following
equation,
Px.x + Py.y ≤ M
Let M = represents the consumer’s income
Px = price of good X
Py = price of goods Y

Budget line is the bundles of goods that exhaust a consumer’s income.


Px.x + Py.y = M

Changes in Income and Price


The consumer’s opportunity set depends on market prices and the consumer’s
income. As these parameters change, so will the consumer’s ooprotunities.
Consumer Equilibrium
The equilibrium consumption bundle is the affordable bundle that yields the
greatest satisfaction to the consumer.

Comparative Statistics

I. Price changes and consumer behavior


A change in the price of a good will lead to a change in the equilibrium
consumption bundle.
1.Goods X and Y are called substitutes if an increase (decrease) in the price of X
leads to an increase (decrease) in the consumption of Y.
Example: Most consumers would view Coke and Pepsi as substitutes. If the
price of Pepsi will increased, most people would tend to consume more Coke.
2.Goods X and Y are called complements if an increase (decrease) in the price
of good X leads to a decrease (increase) in the consumption of good Y.
Example: Beer and pretzels are an example of complementary goods. If the price
of beer increased, most beer drinkers would decrease their consumption of
pretzels.
II. Income Changes and Consumer Behavior
A change in income will lead to a change in the consumption patterns of
consumers. The reason is that changes in income either expand or contract the
consumer’s budget constraint, and the consumer therefore finds it optimal to choose a
new equilibrium bundle.
1.Good X is a normal good if an increase (decrease) in income leads to an
increase (decrease) in the consumption of good X.
2. Good X is an inferior good if an increase (decrease) in income leads to a
decrease (increase) in the consumption og good X.

 Shifts in the Demand Curve: Normal and Inferior Goods


(a) If income increases and chocolate bars are a normal good, then the individual
demand curve will shift to the right. At every price, a greater quantity of chocolate bars
is demanded.

(b) If income increases and chocolate bars are inferior goods, then the individual
demand curve will shift to the left. In the event of a decrease in income, the two cases
are reversed.

III. Substitution and Income Effects


Substitution effect is the movement along a given indifference curve that results from
a change in the relative prices of goods, holding real income constant.
Income effect is the movement from one indifference curve to another that results
from the change in real income caused by a price change.

Applications of Indifference Curve


1.Buy One, Get One Free
2.Cash Gifts, In-Kind Gifts and Gift Certificates
Benefits of selling Gift Certificates
 Reduce the strain on your refund department by offering gift certificates to
customers looking for gift certificates.
 Sold a greater quantity espacially if you sell inferior goods.

The Relationship Between Indifference Curve Analysis And Demand Curves

The market demand curve is the summation of all the individual demand curves in a
given market. It shows the quantity demanded of the good by all individuals at varying
price points. The market demand curve is typically graphed and downward sloping
because as price increases, the quantity demanded decreases.
Application

1.A recent newspaper circular advertised the following special on tires: “Buy three,
get the fourth tire for free – limit one free tire per customer.” If a consumer has
P360.00 to spend on tires and other goods and each tire usually sells for P40.00,
how does this deal impact the customer’s opportunity set?

2.Over the past decade, holiday gift cards have become increasingly popular at
online retailers. Not long ago, online shoppers had to really hunt at most e-retailers’
sites to purchase a gift certificate, but today it is easier to purchase gift cards online
that at traditional retail outlets. Do you think online gift cards are merely a fad?
Explain carefully.

Congratulations! You finished Module 3.


MODULE SUMMARY
 In this chapter, you are provided a basic model of individual behavior that
enables the manager to understand the impact of various managerial decisions
on the actions of consumers.
 Budget set is the bundles of goods a consumer can afford.

REFERENCES

Battalio, Raymond C.; Kagel, John H.; and Kogut, Carl A., “Experimental Confirmation
of the Existence of a Giffen Good.” American Economic Review 81(4), September 1991,
pp. 961-70.
Baumol, William J., Business Behavior, Value and Growth. New York: Macmillan, 1959.
Davis , J., “Transitivity of Preferences.” Behavioral Science, Fall5 1958, pp. 26-33.

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