Institute Of Economic Theories - University Of Miskolc - Hungary
Microeconomics
Lecture 2
Mónika Kis-Orloczki
Assistant lecturer
The analyses of consumers’
behaviour
 Behaviour of households is a synonym to
consumers’ behaviour
 Household: A collective of cohabiting
people, who make own decisions according
to some order and tolerate the
consequences together.
 The decisions are influenced by:
 Needs
 Income
 Price
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Consumers’ decisions
 The goal: To maximize the satisfaction of needs
 maximisation of utility.
 Utility: the satisfaction derived from a
consumption of a good.
 The cardinal utility analysis:
 The consumer is able to measure the utility in cardinal
numbers.
 Goods are comparable.
 The utility of some goods is not a function of another good’s
utility.
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Total Utility (TU)
Total utility (TU): The whole utility feeling gained by
consuming a given amount of goods.
U
Fullness point
1
2
3
4
5
X
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Marginal utility (MU)
Marginal utility (MU): The change in the utility
resulting from the consumption of a subsequent
TU
piece of goods.
MU 
Q
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Caracteristics of Utility
 The more consumed quantity is, the more total utility is
 The contribution of all the pieces of goods to the total
utility shows diminishing tendency in the order of
consumption.  Hypothesis of diminishing marginal
utility = Gossen’s First Rule
 At a point fullness occurs, after consuming a number of
products, the total utility is not growing, but decreasing
 At the Fullness Point TU is at the maximum and
MU=0
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The optimum of consumption
 In case of one good: until the fullness
point
 In case of 2 goods Theory of
Equalization of Utilities
Optimal consumption: MUx = MUy
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Analysis of consumers’ preferences
Axioms of preference ordering
 Completeness: any 2 consumption bundles
can be compared with each other
 Reflexivity: the consumer can identify the
consumption bundles and their utility
 Transitivity :
if utilityA>utilityB and utilityB>utilityC
then utilityA >utilityC
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Indifference curves
 An indifference curve represents the points
of those consumption bundles in the
system of coordinates of two goods, which
have the same utilities and they ensure the
same consumption/utility level.
 The indifference/preference map shows all
the indifference curves in this system of
coordinates. It represents the consumer’s
preference ordering system.
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Illustration of indifference
curves
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Characteristics of indifference
curves
 One can not intersect the other,
 Drawing away from the origin the
indifference curves represent higher
utility levels,
 The slope is always negative,
 The normal indifference curves are
convex to the origin.
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Irregular indifference curves
Perfect substitutes
Perfect complements
Neutral goods
Goods with fullness point or harmful
goods
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Rate of Substitution
 Rate of Substitution (RS): Represents the
ratio of changing quantities of “x” for “y”, or the
slope of the chord between two points (“A” and
“B”) of the indifference curve.
y TU x
RS 

x TU y
It means:
x  TU x  y  TU y
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Marginal Rate of Substitution
(MRS)
dy MU x
MRS 

dx MU y
Y
A
B
C
 Marginal Rate of
Substitution (MRS):
Shows the rate at which
the consumer is just willing
to substitute one good(x)
for another (y), not
changing his Total Utility
It is the slope of the curve
in a tangential point (“A” or
U “B”).
RS
MRS
X
The budget constraint
 Consumption bundles: a combination of
goods or services that a consumer typically
buys together
 The budget constraint means the points
that represent those goods combinations,
which are still purchasable in the
coordination system of – ordinary two –
goods and the money runs out fully.
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The budget line
 Recomposing:
y
I  px  x  py  y
I px
 x
py py
 The slope of the curve:
px
m
py
Y
I/Py
I (budget line)
I/Px
X
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Change in the income of consumers
The line moves parallel, the slope will not change.
Y
I : original income
I1/Py
I1: increasing income
I/Py
I2: decreasing income
I2/Py
I2
I2/Px
I1
I
I/Px
I1/Px
X
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Change in the prices of the goods
There will be a change in the slope of the budget
line
Y
I : original price
I1: decreased price of good x (Px1)
I/Py
I2: increased price of good x (Px2)
I2
I/Px2
I1
I
I/Px
I/Px1
X
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Institute Of Economic Theories - University Of Miskolc - Hungary
Microeconomics
Lecture 3
Mónika Kis-Orloczki
Assistant lecturer
The consumer’s optimal choice
Gossen’s Second Rule
Point B is the optimal combination of
the two goods
Y max=I/Py
A
B
U2
C
U1
I
X max=I/Px
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The changes of income and the
optimal consumption
 Conditions of examination:
 Unchanged preference systems
 Unchanged prices
 Changing income
21
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Income consumption curve (ICC)
and the Engel curve
 ICC curve: represents the points
which show the connection between
the changing income and the optimal
consumption in a two-goods
coordination system.
 Engel curve: show the connection
between the consumer’s income and
the consumption of a good x.
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 Increasing income optimal
consumption is on those indifference
curves that represent higher and higher
utility level.
 Normal goods: slope of both ICC and
Engel curve is positive
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The relation among the consumption of
inferior good and the changing income
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Inferior goods
 Inferior good: the consumption of which
is decreasing as the income raises.
 The consumer gets on higher utility level,
but the inferior good’s consumption
becomes less and less.
 The steepness of ICC and of Engel curve
is negative
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The relation among changing
prices and demand
 The conditions of examination:
 Unchanged preference system
 Unchanged income
 Only one good’s price is changing, the
others are not.
27
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Price Consumption Curve (PCC)
 PCC : represents the points of changing
consumption in the case of changing price in the two
goods coordination system
 Normal goods: increasing price of x, decreasing
consumed amount of x.
 Influence of changing price (Px)on the other product 
decreasing Px, the consumed amount of good y:
 can be increasing if the goods are substitutes.
 can be decreasing if the goods are complements.
 If a price raises, the consumption gets on an indifference
curve which represents lower utility level.
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Individual demand curve
 Individual demand curve: points which show
the connection between the changing price and
consumption of the good x.
 The slope of the demand curve is negative in
the case of normal goods  so if the price is
increasing, demand is decreasing
 BUT!! If the slope of the demand curve is
positive PARADOX PRICE EFFECT
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Paradox price-effect
 Quality-effect: higher quality=higher price.
 Speculation-effect: If the prices are increasing, we
count on a further increase, so we will buy more.
 Veblen-effect: the prestige goods
 Giffen-effect: The demand of good x will be higher
beside of increasing price, if the price of the substitute
product is increasing more.
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Market demand curve
 Market demand curve is the horizontal
sum of the individual demand curves.
 Horizontal because we are curious of the
quantity of goods that the consumers are
willing to buy. (quantity on horizontal
axis)
 The more consumers on the market, the
flatter the market demand curve is.
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The market demand curve
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Elasticity
1. Income elasticity
2. Price elasticity
3. Cross-price elasticity
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1. Income elasticity
 The elasticity of the income: shows
the ratio of the percental changes in
income and demand.
 It shows that how many percentage
changes the demand, if the income of a
consumer changes with one percentage
EQ , I
%Q

%I
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Elasticity of income
 Normal goods Ex , I  0
 Inferior goods
Ex,I  0
 Luxury goods
Ex, I  1
 Every-day consumption goods
Ex, I  1
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2. Elasticity of price
 The elasticity of price shows the ratio
of the percental changes in price and
demand.
 It shows that how many percentage
changes the demand, if the price of a
good changes with one percentage
%x
%Q
E x, px 
 EQ , P 
%p x
%P
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.
Elasticity of price
 Normal goods
Ex, p x  0
 Paradox price effect
Ex, p x  0
 Non-elastic demand
Ex, p x  1
 Elastic demand
Ex, p x  1
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3. Cross-price elasticity
 Cross-price elasticity: shows the ratio
of the percental changes in one
good’s price and another’s demand.
 It shows that how many percentage
changes the demand x, if the price of a
good y changes with one percentage
Ex , p y
%x

%p y
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Cross-price elasticity
 Complement goods
 Substitute goods
 Indifferent goods
Ex, p y  0
Ex, p y  0
Ex, p y  0
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