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    Chapter 6-Household Behavior

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    JAGATHESAN

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    Chapter 6-Household Behavior

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    JAGATHESAN
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    Chapter 6-Household Behavior

    Uploaded by

    JAGATHESAN

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 19

    Principles of Economics

    Twelfth Edition

    Chapter 6
    Household Behavior and
    Consumer Choice

    Copyright © 2017 Pearson Education, Inc. 6-1


    1-1
    Chapter 6 Household Behavior and
    Consumer Choice
    • Every day people make different decisions.
    • In this chapter, we will develop a set of principles that can
    be used to understand decisions in the product market and
    the labor market.
    • A theme in this analysis is the idea of constrained choice.

    Copyright © 2017 Pearson Education, Inc. 6-2


    1-2
    Household Choice in Output Markets
    • Every household must make three basic decisions:
    1. 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

    Copyright © 2017 Pearson Education, Inc. 6-3


    1-3
    The Determinants of Household
    Demand
    • Several factors influence the quantity of a given good or
    service demanded by a single household:
    – The price of the product
    – The income available to the household
    – The household’s accumulated wealth
    – The prices of other products available to the household
    – The household’s tastes and preferences
    – The household’s expectations about future income,
    wealth, and prices

    Copyright © 2017 Pearson Education, Inc. 6-4


    1-4
    The Budget Constraint (1 of 3)
    • budget constraint The limits imposed on household
    choices by income, wealth, and product prices.
    • choice set or opportunity set The set of options that is
    defined and limited by a budget constraint.

    Copyright © 2017 Pearson Education, Inc. 6-5


    1-5
    TABLE 6.1 Possible Budget Choices of a Person Earning $1,000
    per Month after Taxes

    Monthly Other
    Option Rent Food Expenses Total Available?
    A $ 400 $250 $350 $1,000 Yes
    B 600 200 200 1,000 Yes
    C 700 150 150 1,000 Yes
    D 1,000 100 100 1,200 No

    Copyright © 2017 Pearson Education, Inc. 6-6


    1-6
    The Budget Constraint (2 of 3)
    Preferences, Tastes, Trade-offs, and Opportunity Cost
    • Within the constraints imposed by limited incomes and fixed
    prices, households are free to choose what they will and will
    not buy.
    • A household makes a choice by weighing the good or
    service that it chooses against all the other things that the
    same money could buy.
    • With a limited budget, the real cost of any good or service is
    the value of the other goods and services that could have
    been purchased with the same amount of money.

    Copyright © 2017 Pearson Education, Inc. 6-7


    1-7
    FIGURE 6.1 Budget Constraint and Opportunity Set for
    Ann and Tom

    A budget constraint separates


    those combinations of goods
    and services (e.g., point C) that
    are available, given limited
    income, from those that are not
    (e.g., point E).

    The available combinations


    make up the opportunity set.

    Copyright © 2017 Pearson Education, Inc. 6-8


    1-8
    The Budget Constraint (3 of 3)
    The Budget Constraint More Formally
    • Both prices and income affect the size of a household’s
    opportunity set.
    • real income The set of opportunities to purchase real
    goods and services available to a household as
    determined by prices and money income.

    Copyright © 2017 Pearson Education, Inc. 6-9


    1-9
    FIGURE 6.2 The Effect of a Decrease in Price on Ann and Tom’s
    Budget Constraint

    When the price of a good


    decreases, the budget constraint
    swivels to the right, increasing the
    opportunities available and
    expanding choice.

    Copyright © 2017 Pearson Education, Inc. 6-10


    1-10
    The Basis of Choice: Utility (1 of 2)
    • utility The satisfaction a product yields

    Diminishing Marginal Utility

    • 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.

    Copyright © 2017 Pearson Education, Inc. 6-11


    1-11
    The Basis of Choice: Utility (2 of 2)
    • marginal utility (MU) The additional satisfaction gained by
    the consumption of one more unit of a good or service.
    • total utility The total satisfaction a product yields.

    Copyright © 2017 Pearson Education, Inc. 6-12


    1-12
    TABLE 6.2 Total Utility and Marginal FIGURE 6.3 Graphs of Frank’s Total
    Utility of Trips to the Club per Week and Marginal Utility

    Trips Total Marginal


    to Club Utility Utility
    1 12 12
    2 22 10
    3 28 6
    4 32 4
    5 34 2
    6 34 0

    Marginal utility is the additional


    utility gained by consuming one
    additional unit of a commodity—in
    this case, trips to the club.
    When marginal utility is zero, total
    utility stops rising.

    Copyright © 2017 Pearson Education, Inc. 6-13


    1-13
    Income and Substitution Effects
    The Income Effect
    • Assuming nothing else changes, a price decline in a
    product makes you better off because you have more
    income left over.
    • The consumer will usually buy more of the good whose
    price has fallen and this is called the income effect of a
    price change.

    Copyright © 2017 Pearson Education, Inc. 6-14


    1-14
    The Substitution Effect
    • When the price of a product falls, that product also becomes
    relatively cheaper.
    • A fall in the price of product X might cause a household to
    shift its purchasing pattern away from substitutes toward X.
    • This shift is called the substitution effect of a price change.

    Copyright © 2017 Pearson Education, Inc. 6-15


    1-15
    FIGURE 6.5 Income and Substitution Effects of a Price Change

    For normal goods, the income and substitution effects work in the same direction.
    Higher prices lead to a lower quantity demanded, and lower prices lead to a higher
    quantity demanded.

    Copyright © 2017 Pearson Education, Inc. 6-16


    1-16
    Household Choice in Input Markets
    The Labor Supply Decision
    • As in output markets, households face constrained choices
    in input markets. They must decide:
    1. Whether to work
    2. How much to work
    3. What kind of a job to take

    Copyright © 2017 Pearson Education, Inc. 6-17


    1-17
    The Labor Supply Decision
    • Household members must decide how much labor to
    supply.
    • The choices they make are affected by:
    – Availability of jobs
    – Market wage rates
    – Skills they possess
    – The limit of 168 hours in a week

    Copyright © 2017 Pearson Education, Inc. 6-18


    1-18
    The Price of Leisure
    • “Buying” more leisure, however, means spending less time
    working and more time on nonwork activities.
    • For each hour of leisure that you decide to consume, you
    give up one hour’s wages.
    • Thus, the wage rate is the price of leisure.

    Copyright © 2017 Pearson Education, Inc. 6-19


    1-19

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