Consumer Behaviour

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The Consumer’s Optimization Problem
Individual consumption decisions are made with the goal of maximizing total
satisfaction from consuming various goods and services
Subject to the constraint that spending on goods exactly equals the individual’s money
income
Consumer Theory
Assumes buyers are completely informed about:
•Range of products available
•Prices of all products
•Capacity of products to satisfy
•Their income
Requires that consumers can rank all consumption bundles based on the level of
satisfaction they would receive from different units of consumption.
Consumer Theory - Assumptions
Completeness
For every pair of consumption bundles, A and B, the consumer can say one of the
following:
A is preferred to B
B is preferred to A
The consumer is indifferent between A and B
Transitivity
•If A is preferred to B, and B is preferred to C, then A must be preferred to C
Nonsatiation
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More of a good is always preferred to less
The Consumer’s Optimization Problem
Individual consumption decisions are made with the goal of maximizing total
satisfaction from consuming various goods and services
Subject to the constraint that spending on goods exactly equals the individual’s money
income
Consumer Theory
Assumes buyers are completely informed about:
Range of products available
Prices of all products
Capacity of products to satisfy
Their income
Requires that consumers can rank all consumption bundles based on the level of
satisfaction they would receive from different units of consumption.
Consumer Theory - Assumptions
Completeness
For every pair of consumption bundles, A and B, the consumer can say one of the
following:
A is preferred to B
B is preferred to A
The consumer is indifferent between A and B
Transitivity
If A is preferred to B, and B is preferred to C, then A must be preferred to C
Non Satiation
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More of a good is always preferred to less
CONSUMER SURPLUS
Difference between what a consumer is willing to pay
for a good and the amount actually paid.

Consumer Surplus and Demand

Consumer Surplus Consumer surplus is the total
benefit from the consumption of a product, less the
total cost of purchasing it.

Here, the consumer surplus associated with six

concert tickets (purchased at $14 per ticket) is given
by the yellow-shaded area.

Consumer Surplus Generalized

For the market as a whole, consumer surplus is
measured by the area under the demand curve and
above the line representing the purchase price of the
good.
Here, the consumer surplus is given by the yellow-
shaded triangle and is equal to
1/2 ($20 − $14) 6500 = $19,500.
Consumer Surplus and Demand
When added over many individuals, it measures the
aggregate benefit that consumers obtain from buying
goods in a market.
When we combine consumer surplus with the
aggregate profits that producers obtain, we can
evaluate both the costs and benefits of alternative
market structures and public policies.
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