Consumer Behavior

Constraints of the Consumer

 Current Income
 Assets (from Savings)
 Skills
 Time
 Future Income (for Borrowing)

Choice Sets for the consumer

 Our time and skill when we work - leisure or work?
 A financial asset when we have cash in our savings - spend or not spend?
 Our ability to earn future income when we borrow - borrow or not borrow

Choices, Utility (Satisfaction level need by the consumer), Opportunity Cost

 Individuals know their choices (Complete tastes)
 Individuals have preferences (Transitivity)
o People can rock their preferences
o Most preferred
 More is better (Monotonicity)
 Averages are better than extremes (Convexity)
 No sudden "jumps"/changes (Continuity)
 Choices and trade-offs (MRS & opportunity costs) - lose some, gain some (slope)(Marginal rate
of substitution)

Types of Goods
 Products
o Goods or Services
o Goods - Tangible
o Service - Intangible
 Consumer goods
o Use for final utilization
 Industrial goods
o Used as an ingredient for a final product
o Hardware, steel materials
 Perfect substitutes, substitutes
o Pepsi and Coke
o Coffee and tea
 Perfect complements, complements
o Pair of slippers
o This things will not function, if they are not working together
o Coffee and sugar
 Normal Goods
o Demands of this product is affected by the people's income
o High income = Higher demand
o Lower income = Lower demand
 Inferior goods
 o Demand increase when people's income decrease

Income and Leisure

Income effect
 The change in desired hours of work resulting from a change in income, holding the wage
constant
 Leisure is a normal good, so higher income implies a desire for more leisure (fewer hours of
work)
 For a wage increase, income is raised and so the income effect lowers desired work hours
Substitution effect
 The change in desired hours of work resulting from a change in the wage rate, holding income
constant
 A higher wage rate raises the relative price of leisure
 Higher wage = Higher demand or want of work hours
 For a wage increase, the substitution effect raises desired work hours
 Wage is the money paid

Saving & Borrowing

 Responds to changes in interest rate and the wealth effect
 People borrow more if the interest rate is lower
 The wealth effect is the notion that when households become richer as a result of a rise in asset
values, such as corporate stock prices or home values, they spend more and stimulate the
broader economy