R14 Demand and Supply Analysis Consumer Demand
CFA® Level I – Economics
Demand and Supply Analysis: Consumer Demand www.irfanullah.co Graphs, charts, tables, examples, and figures are copyright 2012, CFA Institute.
Reproduced and republished with permission from CFA Institute. All rights reserved.
1
Contents and Introduction
1.
2.
3.
4.
5.
6.
Introduction
Consumer Theory: From Preferences to Demand Functions
Utility Theory: Modelling Preferences and Tastes
The Opportunity Set: Consumption Production, and Investment Choice
Consumer Equilibrium: Maximizing Utility Subject to the Budget Constraint
Revisiting the Consumer’s Demand Function
www.irfanullah.co
2
2. Consumer Theory: From Preferences to Demand Functions
Consumer choice theory relates consumer demand curves to consumer preferences and constraints; it considers a consumer’s
Preferences and willingness to tradeoff between two goods
Budget constraints
What consumer would like to do
What
consumer would do
What consumer can do
www.irfanullah.co
3
3. Utility Theory: Modelling Preferences and Tastes
1. Axioms of the Theory of Consumer Choice
2. Representing Consumer Preference: The Utility Function
3. Indifference Curves
4. Gains from Voluntary Exchange: Creating Wealth through Trade
www.irfanullah.co
4
3.1 Axioms of Consumer Choice Theory
Consumption bundle or basket: combination of goods and services a consumer would like to consume; same goods but different quantities means different bundle
Axiom is an assumption which is assumed to be true
Complete
Preferences
(Completeness)
Transitive
Preferences
(Transitivity)
Non-Satiation
Example 1 www.irfanullah.co 5
3.2 Representing the Preference of a Consumer:
The Utility Function
The utility function is a rule which translates the quantities of goods in each basket into a utility number (utils)
This number is a measure of happiness and is based on an ordinal scale
General case: U = f (Qx1, Qx2,…..Qx3 )
Specific example: say we have milk and bread…
U = f(M, B) = MB
www.irfanullah.co
6
Demand and Supply Analysis: Consumer Demand www.irfanullah.co Graphs, charts, tables, examples, and figures are copyright 2012, CFA Institute.
Reproduced and republished with permission from CFA Institute. All rights reserved.
1
Contents and Introduction
1.
2.
3.
4.
5.
6.
Introduction
Consumer Theory: From Preferences to Demand Functions
Utility Theory: Modelling Preferences and Tastes
The Opportunity Set: Consumption Production, and Investment Choice
Consumer Equilibrium: Maximizing Utility Subject to the Budget Constraint
Revisiting the Consumer’s Demand Function
www.irfanullah.co
2
2. Consumer Theory: From Preferences to Demand Functions
Consumer choice theory relates consumer demand curves to consumer preferences and constraints; it considers a consumer’s
Preferences and willingness to tradeoff between two goods
Budget constraints
What consumer would like to do
What
consumer would do
What consumer can do
www.irfanullah.co
3
3. Utility Theory: Modelling Preferences and Tastes
1. Axioms of the Theory of Consumer Choice
2. Representing Consumer Preference: The Utility Function
3. Indifference Curves
4. Gains from Voluntary Exchange: Creating Wealth through Trade
www.irfanullah.co
4
3.1 Axioms of Consumer Choice Theory
Consumption bundle or basket: combination of goods and services a consumer would like to consume; same goods but different quantities means different bundle
Axiom is an assumption which is assumed to be true
Complete
Preferences
(Completeness)
Transitive
Preferences
(Transitivity)
Non-Satiation
Example 1 www.irfanullah.co 5
3.2 Representing the Preference of a Consumer:
The Utility Function
The utility function is a rule which translates the quantities of goods in each basket into a utility number (utils)
This number is a measure of happiness and is based on an ordinal scale
General case: U = f (Qx1, Qx2,…..Qx3 )
Specific example: say we have milk and bread…
U = f(M, B) = MB
www.irfanullah.co
6