RHEA JOY C.

JOVEN MANAGERIAL ECONOMICS 3:00-6:00PM

CHAPTER 4 BRIEFER

THE THEORY OF INDIVIDUAL BEHAVIOR

This chapter develops tools that help a manager understand the behavior of individuals,
such as consumers and workers, and the impact of alternative incentives on their decisions.
This chapter develops tools that help a manager understand the behavior of individuals,
such as consumers and workers, and the impact of alternative incentives on their
decisions.Despite the complexities of human thought processes, managers need a model
that explains how individuals behave in the marketplace and in the work environment. Of
course, attempts to model individual behavior cannot capture the full range of real world
behavior. Life would be simpler for managers of firms if the behavior of individuals were not
so complicated. On the other hand, the rewards for being a manager of a firm would be
much lower. If you achieve an understanding of individual behavior, you will gain a
marketable skill that will help you succeed in the business world.

In characterizing consumer behavior, there are two important but distinct factors to
consider: consumer opportunities and consumer preferences. Consumer opportunities
represent the possible goods and services consumers can afford to consume. Consumer
preferences determine which of these goods will be consumed.

In making decisions, individuals face constraints. There are legal constraints, time
constraints, physical constraints, and, of course, budget constraints. To maintain our focus
on the essentials of managerial economics without delving into issues beyond the scope of
this course, we will examine the role prices and income play in constraining consumer
behavior. the budget constraint restricts consumer behavior by forcing the consumer to
select a bundle of goods that is affordable.

The consumer’s opportunity set depends on market prices and the consumer’s income.
As these parameters change, so will the consumer’s opportunities.

The equilibrium consumption bundle is the affordable bundle that yields the greatest
satisfaction to the consumer. The objective of the consumer is to choose the consumption
bundle that maximizes his or her utility, or satisfaction. If there was no scarcity, the
more-is-better property would imply that the consumer would want to consume bundles that
contained infinite amounts of goods. However, one implication of scarcity is that the
consumer must select a bundle that lies inside the budget set, that is, an affordable bundle.
A change in the price of a good will lead to a change in the equilibrium consumption bundle.
A change in income also will lead to a change in the consumption patterns of consumers.
The reason is that changes in income either expand or contract the consumer’s budget
constraint, and the consumer therefore finds it optimal to choose a new equilibrium bundle.

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