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Expand Up @@ -1782,13 +1782,27 @@ <h2 class="author">Managerial Economics for MBA Students</h2>
<h3 class="date">1 November 2023</h3>
</section>

<section class="slide level2">

<style type="text/css">
.reveal p {
text-align: left;
}
.reveal ul {
display: block;
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}
</style>
</section>
<section>
<section id="basic-assumptions-of-consumer-theory" class="title-slide slide level1">
<h1>BASIC ASSUMPTIONS OF CONSUMER THEORY</h1>

</section>
<section id="the-consumers-optimization-problem" class="slide level2 scrollable">
<h2 class="scrollable">The Consumer’s Optimization Problem</h2>
<h2 class="scrollable">The Consumer’s optimization problem</h2>
<p>As a basic premise for analyzing consumer behavior, we will assume
that:</p>
<ol type="1">
Expand All @@ -1803,13 +1817,13 @@ <h2 class="scrollable">The Consumer’s Optimization Problem</h2>
time period in question.</p></li>
</ol>
</section>
<section id="consumption-bundle" class="slide level2 center">
<h2 class="center">Consumption Bundle</h2>
<section id="consumption-bundle" class="slide level2">
<h2>Consumption bundle</h2>
<p>A particular combination of specific quantities of goods or
services.</p>
</section>
<section id="properties-of-consumer-preferences" class="slide level2">
<h2>Properties of Consumer Preferences</h2>
<h2>Properties of consumer preferences</h2>
<ol type="1">
<li>Complete preference ordering</li>
</ol>
Expand All @@ -1826,19 +1840,239 @@ <h2>Properties of Consumer Preferences</h2>
<p>Consumers always prefer to have more of a good rather than less of
the good.</p>
</section>
<section id="utility" class="slide level2 center">
<h2 class="center">Utility</h2>
<section id="utility" class="slide level2">
<h2>Utility</h2>
<p>Utility is the name economists give to the benefits consumers obtain
from the goods and services they consume. While utility implies
usefulness, many of the products most of us consume may not be
particularly useful.</p>
</section>
<section id="the-utility-function" class="slide level2 center">
<h2 class="center">The Utility Function</h2>
<section id="utility-function" class="slide level2">
<h2>Utility function</h2>
<p>An equation that shows an individual’s perception of the level of
utility that would be attained from consuming each conceivable bundle of
goods: U = f (X, Y).</p>
</section></section>
<section>
<section id="indifference-curves" class="title-slide slide level1">
<h1>INDIFFERENCE CURVES</h1>

</section>
<section id="indifference-curve" class="slide level2">
<h2>Indifference curve</h2>
<p>A set of points representing different combinations of goods and
services, each of which provides an individual with the same level of
utility. Therefore, the consumer is indifferent among all combinations
of goods shown on an indifference curve.</p>
<p>Indifference curves are assumed to have two important properties —
they are:</p>
<ol type="1">
<li><p>Downward sloping</p></li>
<li><p>Convex</p></li>
</ol>
</section>
<section id="marginal-rate-of-substitution-mrs" class="slide level2">
<h2>Marginal rate of substitution (MRS)</h2>
<p>MRS measures the number of units of Y that must be given up per unit
of X added so as to maintain a constant level of utility.</p>
<p>For a unit increase (decrease) in X, the MRS measures the decrease
(increase) in Y needed to keep utility constant (<span class="math inline">\(MRS = \Delta Y/\Delta X\)</span>).</p>
<p>For very small changes in X, the MRS is the absolute value of the
slope of the indifference curve at the given value of X.</p>
<p>The MRS decreases as the consumer moves down an indifference
curve.</p>
</section>
<section id="indifference-map" class="slide level2">
<h2>Indifference map</h2>
<p>An indifference map is made up of two or more indifference
curves.</p>
<p>The higher (or further to the right) an indifference curve, the
greater the level of utility associated with the curve.</p>
<p>Combinations of goods on higher indifference curves are preferred to
combinations on lower curves.</p>
</section>
<section id="marginal-utility-mu" class="slide level2">
<h2>Marginal utility (MU)</h2>
<p>MU is the addition to total utility (U) that is attributable to
consuming one more unit of a good (X), holding constant the amounts of
all other goods consumed.</p>
<p><span class="math display">\[MU_X = \frac{\Delta U}{\Delta X}
\]</span></p>
<p>The marginal rate of substitution of X for Y can be interpreted as
the ratio of the marginal utility of X divided by the marginal utility
of Y:</p>
<p><span class="math display">\[MRS = -\frac{\Delta Y}{\Delta X} =
\frac{MU_X}{MU_Y} \]</span></p>
</section></section>
<section>
<section id="the-consumers-budget-constraint" class="title-slide slide level1">
<h1>THE CONSUMER’S BUDGET CONSTRAINT</h1>

</section>
<section id="budget-line" class="slide level2">
<h2>Budget line</h2>
<p>The budget line is the set of all combinations or bundles of goods
that can be purchased at given prices if the entire income is spent.</p>
<p>The budget line divides the commodity space into the set of
attainable bundles and the set of unattainable bundles.</p>
<p>An increase (decrease) in income causes a parallel outward (inward)
shift in the budget line.</p>
<p>An increase (decrease) in the price of X causes the budget line to
pivot inward (outward) around the original vertical intercept.</p>
</section></section>
<section>
<section id="utility-maximization" class="title-slide slide level1">
<h1>UTILITY MAXIMIZATION</h1>

</section>
<section id="maximizing-utility-subject-to-a-limited-income" class="slide level2">
<h2>Maximizing utility subject to a limited income</h2>
<p>A consumer maximizes utility subject to a limited income at the
combination of goods for which the indifference curve is just tangent to
the budget line. At this combination:</p>
<p><span class="math display">\[ -\frac{\Delta Y}{\Delta X} = MRS =
\frac{MU_X}{MU_Y} \]</span></p>
</section>
<section id="marginal-utility-interpretation-of-consumer-optimization" class="slide level2">
<h2>Marginal utility interpretation of consumer optimization</h2>
<p>To obtain maximum satisfaction from a limited income, a consumer
allocates income so that the marginal utility per dollar spent on each
good is the same for all commodities purchased, and all income is
spent.</p>
<p><span class="math display">\[ \frac{MU_1}{P_1} = \frac{MU_2}{P_2} =
\frac{MU_3}{P_3} = \ldots = \frac{MU_n}{P_n}\]</span></p>
</section>
<section id="finding-the-optimal-bundle-of-hot-dogs-and-cokes" class="slide level2">
<h2>Finding the optimal bundle of hot dogs and cokes</h2>
<p>Suppose you attend the afternoon baseball game and have only $40 to
spend on hot dogs and Cokes. You missed lunch, and $40 is not going to
be enough money to buy all the Cokes and hot dogs you would want to
consume. The only rational thing to do is to maximize your utility
subject to your $40 budget constraint.</p>
<p>On the back of your baseball program you make a list of the marginal
utility you expect to receive from various levels of hot dog and Coke
consumption. You then divide the marginal utilities by the prices of hot
dogs and Cokes, $5 and $4, respectively. The back of your baseball
program looks like the table on the next slide:</p>
</section>
<section class="slide level2">

<table>
<thead>
<tr class="header">
<th style="text-align: center;">Units per game</th>
<th style="text-align: center;"><span class="math inline">\(MU_{h}\)</span></th>
<th style="text-align: center;"><span class="math inline">\(MU_hD\)</span></th>
<th style="text-align: center;"><span class="math inline">\(MU_c\)</span></th>
<th style="text-align: center;"><span class="math inline">\(MU_cD\)</span></th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td style="text-align: center;">1</td>
<td style="text-align: center;">40</td>
<td style="text-align: center;">8</td>
<td style="text-align: center;">120</td>
<td style="text-align: center;">30</td>
</tr>
<tr class="even">
<td style="text-align: center;">2</td>
<td style="text-align: center;">30</td>
<td style="text-align: center;">6</td>
<td style="text-align: center;">80</td>
<td style="text-align: center;">20</td>
</tr>
<tr class="odd">
<td style="text-align: center;">3</td>
<td style="text-align: center;">25</td>
<td style="text-align: center;">5</td>
<td style="text-align: center;">40</td>
<td style="text-align: center;">10</td>
</tr>
<tr class="even">
<td style="text-align: center;">4</td>
<td style="text-align: center;">20</td>
<td style="text-align: center;">4</td>
<td style="text-align: center;">32</td>
<td style="text-align: center;">8</td>
</tr>
<tr class="odd">
<td style="text-align: center;">5</td>
<td style="text-align: center;">15</td>
<td style="text-align: center;">3</td>
<td style="text-align: center;">16</td>
<td style="text-align: center;">4</td>
</tr>
<tr class="even">
<td style="text-align: center;">6</td>
<td style="text-align: center;">10</td>
<td style="text-align: center;">2</td>
<td style="text-align: center;">8</td>
<td style="text-align: center;">2</td>
</tr>
</tbody>
</table>
<p>What is the optimal bundle of hot dogs and coke given the budget
constraint?</p>
</section></section>
<section>
<section id="individual-demand-and-market-demand-curves" class="title-slide slide level1">
<h1>INDIVIDUAL DEMAND AND MARKET DEMAND CURVES</h1>

</section>
<section id="an-individual-consumers-demand-curve" class="slide level2">
<h2>An individual consumer’s demand curve</h2>
<p>The demand curve of an individual for a specific commodity relates
utility-maximizing quantities purchased to market prices, holding
constant income and the prices of all other goods.</p>
<p>The slope of the demand curve illustrates the law of demand:
<strong>Quantity demanded varies inversely with price</strong>.</p>
</section>
<section id="market-demand" class="slide level2">
<h2>Market demand</h2>
<p>The market demand can be considered a list of prices and the
quantities consumers are willing and able to purchase at each price in
the list, other things being held constant.</p>
<p>The market demand curve is the horizontal summation of the demand
curves of all consumers in the market.</p>
<p>It therefore shows how much all consumers demand at each price over
the relevant range of prices.</p>
</section>
<section id="market-demand-and-marginal-benefit" class="slide level2">
<h2>Market demand and marginal benefit</h2>
<p>For any particular quantity demanded, the price on the vertical axis
of the market demand curve measures two things:</p>
<ol type="1">
<li><p>the maximum price consumers will pay to buy that quantity of the
good,</p></li>
<li><p>the dollar value of the benefit to buyers of that particular unit
of the good.</p></li>
</ol>
<p>A market demand curve, then, gives the marginal benefit (value)
individuals place on the last unit consumed.</p>
</section></section>
<section>
<section id="corner-solutions" class="title-slide slide level1">
<h1>CORNER SOLUTIONS</h1>

</section>
<section id="corner-solution" class="slide level2">
<h2>Corner solution</h2>
<p>A situation where the utility-maximizing bundle lies at one of the
endpoints of the budget line and the consumer chooses to consume zero
units of one of the goods.</p>
<p><span class="math display">\[ \frac{MU_1}{P_1} &lt; \frac{MU_2}{P_2}
= \frac{MU_3}{P_3} = \ldots = \frac{MU_n}{P_n}\]</span></p>
</section></section>
<section id="questions" class="title-slide slide level1">
<h1>QUESTIONS?</h1>

</section>

<section id="thank-you" class="title-slide slide level1">
<h1>THANK YOU!</h1>

</section>
</div>
</div>

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