21 Teori Consumer Choice P R I N C I P L E S O F F O U R T H E D I T I O N This chapter covers topics considered advanced for the typical principles course: budget constraints, indifference curves, household optimization, and the income and substitution effects of price changes. Most students find it more difficult than average. The first half of the chapter is pure theory. The second half applies the theory to three consumer choice problems: 1) Giffen goods and positively-sloped demand curves 2) the labor-leisure choice 3) the effects of interest rates on household saving This is a tough chapter for PowerPoint. It is loaded with complex graphs of household optimization. For the initial batch of PowerPoints released in Spring 2006, most of these graphs are not animated. I will be animating more of them when I prepare the annual update to be released in 2007.

Pada Bab ini, kita akan mencari jawaban atas pertanyaan-pertanyaan dibawah ini: Bagaimana budget constraint menggambarkan kemampuan konsumen dalam memilih? Bagaimana indifference curve menggambarkan preferensi konsumen? Apa yang dapat menentukan seorang konsumen membagi sumber daya yang dimiliki antara dua barang yang ingin dikonsumsi? CHAPTER 21 THE THEORY OF CONSUMER CHOICE

Pendahuluan Recall one of the Ten Principles: People face tradeoffs. Membeli barang tertentu dengan jumlah yang banyak menyisakan pendapatan yang lebih sedikit untuk membeli barang lain. Berkerja lebih banyak untuk pendapatan yang lebih agar bisa konsumsi banyak tapi sedikit waktu untuk bersantai. Mengurangi saving untuk konsumsi hari ini tapi akan mengurangi konsumsi masa depan. Bab ini mengeksplorasi bagaimana konsumen membuat keputusan seperti ini. CHAPTER 21 THE THEORY OF CONSUMER CHOICE

Budget Constraint: What the Consumer Can Afford Dua barang: Pizza dan pepsi “consumption bundle” adalah sebuah kombinasi tertentu dari barang. contoh 20 pizza & 300 pepsi Budget constraint: grafik yang menunjukan beberapa kombinasi dari dua barang yang dapat dibeli (dikonsumsi) oleh konsumen. The two-good assumption greatly simplifies the analysis without altering the basic insights about consumer choice. If your students remember the Production Possibilities Frontier, you might tell them that a budget constraint is, in essence, a “consumption possibilities frontier” for the consumer: it shows all combinations (bundles) of the two goods that the consumer can afford to buy. CHAPTER 21 THE THEORY OF CONSUMER CHOICE

A C T I V E L E A R N I N G 1: Budget constraint Pendapatan konsumen: $1000 Harga: $10 per pizza, $2 pepsi A. Jika konsumen menghabiskan pendapatannya untuk pizza, berapa banyak pizza yang dapat ia beli? B. Jika konsumen menghabiskan pendapatanya untuk pepsi, berapa banyak pepsi yang dapat dibeli? C. Jika konsumen mengeluarkan $400 untuk pizza, berapa banyak pizza dan pepsi yang dapat ia beli? D. Plot setiap bundles dari bagian A-C pada diagram yang mengukur kuantitas dari indomie (horizontal axis) dan kuantitas susu coklat (vertical axis). 4

A C T I V E L E A R N I N G 1: Answers D. budget constraint menunjukan bundles yang konsumen mampu beli. pepsi A. $1000/$10 = 100 pizza B. $1000/$2 = 500 pepsi C. $400/$10 = 40 pizza $600/$2 = 300 pepsi B C A Pizza 5

Slope Budget Constraint Pepsi Dari C D, “rise” = –100 Pepsis “run” = +20 pizzas Slope = –5 Konsumen harus melepaskan 5 Pepsi untuk mendpatkan sejumlah pizza. C D Pizza CHAPTER 21 THE THEORY OF CONSUMER CHOICE

Slope Budget Constraint slope budget constraint sama dengan Tingkat dimana konsumen menukarkan pepsi untuk pizza opportunity cost of pizza berkenaan dengan Pepsi Harga relatif dari pizza: CHAPTER 21 THE THEORY OF CONSUMER CHOICE

A C T I V E L E A R N I N G 2: Exercise Pepsis Tunjukan apa yang terjadi pada budget constraint jika: A. Pendapatan turun menjadi $800 B. Harga Pepsi meningkat $4/pint. Pizzas 8

A C T I V E L E A R N I N G 2A: Answers Pepsis Turun pendapatan menggeser budget constraint kedalam. Konsumen dapat membeli $800/$10 = 80 pizzas or $800/$2 = 400 Pepsis Atau kombinasi lain. Pizzas 9

A C T I V E L E A R N I N G 2B: Answers Kenaikan harga dari suatu barang akan terjadi pivots budget constraint inward. Pepsis konsumen tetap membeli 100 pizza. Tapi, hanya dapat $1000/$4 = 250 Pepsis. catatan: slope smaller, harga relatif pizza sekarang hanya 4 Pepsi. Pizzas 10

Preferences: What the Consumer Wants Indifference curve: menunjukan beberapa kombinasi konsumsi dua macam barang yang memberikan tingkat kepuasan yang sama pada konsumen Point out the following: The consumer is indifferent between bundles A, B, and C, because they are all on the same indifference curve. Bundle D is on a higher indifference curve, so it is preferred to A, B, and C. (MRS will be introduced on the following slide.) CHAPTER 21 THE THEORY OF CONSUMER CHOICE

Preferences: What the Consumer Wants Marginal rate of substitution (MRS): tingkat dimana konsumen bersedia untuk menukarkan satu barang untuk barang lain juga, slope dari indifference curve In this case, the MRS is the amount of Pepsi a consumer would be willing to give up to get one more pizza. In effect, the MRS is the marginal value of pizza – in terms of Pepsi. CHAPTER 21 THE THEORY OF CONSUMER CHOICE

Four Properties of Indifference Curves 1. Indifference curves yang lebih tinggi lebih disukai dari yang lebih rendah. 2. Indifference curves are downward sloping. 1. Any point on the indifference curve labeled I2, such as D, is preferred to any point on indifference curve I1, such as A, B, or C. 2. Understanding the negative slope: If the quantity of one good is reduced, the quantity of the other must be raised in order for the consumer to be equally happy. CHAPTER 21 THE THEORY OF CONSUMER CHOICE

Four Properties of Indifference Curves 3. Indifference curve tidak boleh bersinggungan Jika terjadi, konsumen akan mengabaikan A dan C. tidak masuk akal. Proving that indifference curves cannot cross: The consumer should be indifferent between A and B, because they are on the same indifference curve. The consumer should be indifferent between B and C, because they are on the same indifference curve. Therefore, the consumer should be indifferent between A and C. But this doesn’t make sense, because C has more of both goods than A! CHAPTER 21 THE THEORY OF CONSUMER CHOICE

Four Properties of Indifference Curves 4. Indifference curves are bowed inward. Sedikit pizza yang dimiliki konsumen, lebih banyak pepsi untuk ditukar sejumlah pizza The MRS measures the marginal value of the good on the horizontal axis, in terms of the good on the vertical axis. At point A, the consumer has 3 pizzas and 8 pints of Pepsi. The consumer is willing to give up a pizza to get 6 more pints of Pepsi. Thus, MRS = value of a pizza in terms of Pepsi = 6. At point B, the consumer has 7 pizzas and only 3 pints of Pepsi. The consumer only requires one more pint of Pepsi to make her willing to give up a pizza. Thus, MRS = value of a pizza in terms of Pepsi = 1. Why the difference? At point B, she has lots of pizza and not much Pepsi. At point A, she has lots of Pepsi and not much pizza. Thus, at the margin, pizza is more valuable relative to Pepsi at point B (when she has little pizza) than at point A (when she has lots of pizza). In general, as you move down along an indifference curve, you get more and more of the good on the horizontal axis, causing a fall in the marginal value of additional units of this good (in terms of the other good, which is getting scarcer). CHAPTER 21 THE THEORY OF CONSUMER CHOICE

One Extreme Case: Perfect Substitutes Perfect substitutes: dua barang dengan straight-line indifference curves, constant MRS contoh: nickels & dimes Consumer selalu bersedia untuk menukarkan dua nickels untuk satu dime. It is hard to think of examples of perfect substitutes. But it’s easy to think of examples that are close substitutes, and therefore are likely to have indifference curves that are not very bowed: 1) Movies (at the movie theater) and videos at home. A consumer might be willing to trade two videos for one night at the movies. 2) Coke and Pepsi (for consumers that do not perceive much difference between them). 3) Vacations in Hawaii and vacations in the Bahamas CHAPTER 21 THE THEORY OF CONSUMER CHOICE

Another Extreme Case: Perfect Complements Perfect substitutes: dua barang dengan right-angle indifference curves Contoh: sepatu kiri dan sepatu kanan {7 sepatu kiri, 5 sepatu kanan} is just as good as {5 left shoes, 5 right shoes} Again, It is hard to think of examples of perfect complements. But it’s easy to think of examples that are good though not perfect complements, and therefore are likely to have indifference curves that are very bowed: 1) tickets to rock concerts and parking at the arena in which the concert takes place 2) hot dogs and hot-dog buns 3) brewed Starbucks coffee and 20 spoons of sugar (Anyone who’s tried brewed Starbucks coffee, except the heartiest souls, will be able to relate to this example!) CHAPTER 21 THE THEORY OF CONSUMER CHOICE

Optimization: What the Consumer Chooses optimal bundle adalah titik dimana budget constraint menyentuh/bersinggungan highest indifference curve. MRS = relative price at the optimum: indiff curve dan budget constraint memiliki slope yang sama. The optimal bundle must satisfy this condition: MRS = relative price Intuition: The relative price is the price of an additional pizza in terms of Pepsi. The MRS is the marginal value of pizza in terms of Pepsi. At the margin, these must be equal; otherwise, a different bundle would make the consumer happier. Suppose, for example, that MRS > relative price. The value of an additional pizza is higher than the price of an additional pizza (in terms of Pepsi). Hence, the consumer would be better off buying more pizza and less Pepsi. Or, if MRS < relative price, then the value of the marginal pizza is smaller than its relative price. The consumer would be happier if she bought one fewer pizza and used the savings to buy more Pepsi. CHAPTER 21 THE THEORY OF CONSUMER CHOICE

The Effects of an Increase in Income In an earlier Active Learning exercise, students found that a decrease in income shifts the budget constraint inward. It should now be easy for them to understand that an increase in income shifts the budget line outward, as depicted here. With more income, the budget constraint is higher, and the consumer can reach a higher indifference curve. As depicted on this slide, the new optimal bundle has more of both goods, implying that both goods are normal goods. What if one of the goods is inferior? See the next slide…. CHAPTER 21 THE THEORY OF CONSUMER CHOICE

A C T I V E L E A R N I N G 3: Inferior vs. normal goods normal goods peningkatan pendapatan, meningkatkan kuantitas yang diminta. inferior goods peningkatan pendapatan, mengurangi kuantitas yang diminta. Katakanlah pizza adalah barang normal dan Pepsi adalah barang inferior Menggunakan diagram untuk menunjukan efek dari peningkatan pendapatan terhadap optimal bundle. Instead of merely showing students the diagram for the case where one of the goods is inferior, let’s just remind them of the definition and see if they can figure out how to draw the diagram. 20

A C T I V E L E A R N I N G 3: Answers

The Effects of a Price Change In an earlier Active Learning exercise, students found that an increase in the price of Pepsi causes the budget line to pivot inward. So it should now be easy for them to understand why a decrease in the price of Pepsi causes the budget line to pivot outward. In this example, the new optimal bundle has more Pepsi. This is what one would expect, since Pepsi is less expensive relative to pizza. The new optimal bundle also has less pizza. It’s a little less clear that this should be so, because the price change has two opposing effects on the demand for pizza, as discussed on the next slide. 22

Efek Pendapatan dan Efek substitusi Turunnya harga Pepsi memiliki dua dampak pada konsumsi yang optimal dari dua barang. Income effect (efek pendapatan) turunnya harga Pepsi meningkatkan daya beli konsumen, yang memungkinkan dia untuk mencapai kurva indifference curve yang lebih tinggi. Substitution effect ( efek substitusi) turunnya harga Pepsi membuat pizza relatif lebih mahal dari pepsi, menyebabkan konsumen membeli sedikit pizza untuk pepsi yang lebih banyak. CHAPTER 21 THE THEORY OF CONSUMER CHOICE

Income and Substitution Effects This diagram decomposes the movement from the old optimum (A) to the new one (C) into two parts. The first part, from A to B, represents the substitution effect. It shows the change in the optimal bundle due to the relative price change, holding constant the consumer’s level of well-being. The second part, from B to C, represents the income effect. It shows the change in the optimal bundle due to the increase in the purchasing power of the consumer’s income. The dashed line through point B is parallel to the new budget line through point C, indicating that we are holding relative prices constant to see how the increase in income affects the optimal bundle. 24

Deriving the Demand Curve for Pepsi Left graph: price of Pepsi falls from $2 to $1 Right graph: Pepsi demand curve The left graph shows that the consumer will demand 250 pints of Pepsi when the price is $2, and 750 pints when the price is $1. The right graph plots these quantity-price combinations and draws the demand curve for Pepsi. CHAPTER 21 THE THEORY OF CONSUMER CHOICE

Application 1: Giffen Goods Apakah semua barang mematuhi Law of Demand? Kentang dan daging, dan kentang adalah inferior good. Jika harga kentang meningkat, substitution effect: beli sedikit kentang income effect: beli banyak kentang income effect > substitution effect, maka kentang adalah Giffen good, suatu barang dimana harga barang meningkat akan meningkatkan jumlah kuantitas yang diminta. CHAPTER 21 THE THEORY OF CONSUMER CHOICE

Application 1: Giffen Goods An increase in the price of potatoes rotates the budget line inward. The substitution effect would cause the consumer to buy fewer potatoes. Imagine moving down along indifference curve I1 until reaching the point where its slope just equals the slope of the new budget line. At that point, demand for potatoes is lower, because consumers are substituting meat for potatoes. But if potatoes are an inferior good, the income effect causes demand for potatoes to rise: the price increase makes the consumer generally worse off. The consumer responds by buying less meat (the normal good) and more potatoes (the inferior good). If potatoes are a Giffen good, the income effect exceeds the substitution effect, so the net effect of a price increase on demand for potatoes is positive!!! As the book notes, Giffen goods are extremely rare – if they exist at all! CHAPTER 21 THE THEORY OF CONSUMER CHOICE

Ringkasan Bab Budget constraint konsumen menunjukan kemungkinan kombinasi dari dua barang yang berbeda yang dapat dibeli pada pendapatan dan harga tertentu Slope budget constraint sama dengan harga relatif dari barang tersebut. A change in the price of one of the goods pivots the budget constraint. CHAPTER 21 THE THEORY OF CONSUMER CHOICE

Ringkasan Bab Indifference curves mewakili preferensi seseorang. Indifference curve menunjukan berbagai kombinasi dua macam barang yang memberikan tingkat happiness yang sama. IC yang tinggi lebih baik. Slope indifference curve pada titik tertentu adalah marginal rate of substitution – suatu tingkat dimana konsumen bersedia untuk menukarkan suatu barang untuk barang lain. CHAPTER 21 THE THEORY OF CONSUMER CHOICE

Bab Ringkasan Ketika harga dari suatu barang jatuh, akan berdampak pada income effect dan substitution effect. Income effect adalah salah satu bagian dari perubahan kuantitas yang diminta disebabkan oleh perubahan pendapatan riil. (Nicholson) Substitution effect adalah salah satu aspek dari perubahan kuantitas yang diminta sebagai akibat adanya substitusi satu barang dengan barang lainnya. SE ditunjukan melalui pergerakan sepanjang kurva indifference curve. (Nicholson) CHAPTER 21 THE THEORY OF CONSUMER CHOICE