The Consumer & Demand
4-1. Consumer theory
A consumer is
a person who buys a product or uses any service.
Consumer theory is a
theory of economics. It relates preferences(throughindifference curves and budget constraints) to consumer demand curves. Important variables used to explain
the amount demanded of a good are the price per unit of that good and money
income of the consumer.
4-2. indifference curve
An
indifference curve is a graph showing combinations of goods for
which a consumer is indifferent, that is, it has no preferencefor one combination against another, as they give
the same level of satisfaction for the consumer in the same curve.
Examples of Indifference Curves:
Below is an example of
anindifference map having three
indifference curves:
4-3. Indifference Table:
group |
Meat(kg) |
Bread(Piece) |
1 |
3 |
15 |
2 |
6 |
10 |
3 |
10 |
5 |
4-4. Marginal ratio of substitution (MRS): It’s the a mount of (Y) good that the
consumer can abandon it to one good from (X).
MRS= 6-3/15-10
=3/5
= 0.6
That is mean the
consumer above can substitute 15 pieces of bread by 3
kgof meat, or substitute 10 pieces of bread by 6
kg of meat
4-5. Price effects
These curves can be used to predict the effect of changes to the budget
constraint. The graphic below shows the effect of a price shift for good Y. If
the price of Y increases, the budget constraint will shift from BC2 to BC1.
Notice: because the price of X does not change, the consumer can
still buy the same amount of X if he or she chooses to buy only good X. On the
other hand, if the consumer chooses to buy only good Y, he or she will be able
to buy less of good Y because its price has increased.