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PGP - 1, Section A
Term 1
Lecture 5
Instructor: Tirthatanmoy Das
Indian Institute of Management Bangalore
July 1, 2019
Previous class
3
But why would a manager care?
§ Pricing
§ Advertising
§ Product quality
4
Objectives
…
and possibly many more
7
Consumer’s problem
Intuition…
9
Consumer behavior: 3 distinct steps
§ Consumer’s preference
§ Consumer’s choices
10
Consumer’s Preference
But preference must satisfy following assumptions:
§ Completeness: consumers can compare and rank all
possible baskets. For any 2 baskets A and B, a consumer
will prefer A to B, or will prefer B to A, or will be
indifferent between the two.
§ Transitivity: If a consumer prefers basket A to basket B
and basket B to basket C, then the consumer also
prefers A to C.
§ More is better than less.
11
Which bundles are preferred
Basket A is clearly preferred to basket G, while E is
clearly preferred to A. But cannot compare B, D, or H
without more information.
12
Indifference curve
Curve representing all combinations of market baskets
that provide a consumer with the same level of
satisfaction.
13
Indifference map
Graph containing a set of indifference curves
showing the baskets among which a consumer is
indifferent.
14
Indifference curves cannot intersect
15
Shape of indifference curves
Marginal rate of substitution: Maximum amount of a good
that a consumer is willing to give up in order to obtain
one additional unit of another good to stay on the same
indifference curve.
16
Shape of indifference curves
Marginal rate of substitution: The magnitude of the slope
of an indifference curve measures the consumer’s
marginal rate of substitution (MRS) between two goods.
17
Perfect Substitutes and Perfect
Complements
Perfect substitutes: Two goods for which the marginal rate
of substitution of one for the other is a constant.
18
Perfect Substitutes and Perfect
Complements
Indifference curves:
19
Utility and utility functions
Example: 𝑢 𝐹, 𝐶 = 𝐹×𝐶
20
Utility function and indifference curves
21
Marginal utility
22