Microeconomics presentation structure

1. Introduction
Good morning, everyone.
Have you ever wondered why we make certain choices as consumers? For instance, why do
some people choose to splurge on luxury goods while others opt for budget-friendly
alternatives? Or how promotions and discounts influence what we buy? These everyday
decisions are at the core of what economists call The Theory of Consumer Choice.
Understanding this is essential, as the essence of economics lies in managing scarcity—
choosing between competing needs with finite resources.1 In light of this, we present you the
topic of our presentation: “Psychology and consumer behavior during major promotions.”

To give you all a good grasp of the topic, we will go through the following sections:
● Budget Constraints – We’ll start by examining how income and prices limit the
combinations of goods consumers can afford.
● Preferences and Utility – Next, we’ll discuss how consumers rank their choices and
measure satisfaction, including the role of utility functions.
● Indifference Curves – This section will illustrate how consumers balance trade-offs
between goods to maintain the same level of satisfaction.
● Income and Substitution Effects – We’ll explain how changes in income and prices
influence consumer choices.
● Case Studies – Finally, we’ll analyze…

2. Theories Summary
2.1. Budget Constraints:
Budget constraint is the total amount of goods a person can afford with the current budget.
So, to keep things simple, I give u an example:
Suppose the consumer has an income of $1,000 per month and she spends her entire income
on pizza and Pepsi. The price of a pizza is $10, and the price of a liter of Pepsi is $2.

This table shows the combinations of Pepsi and Pepsi that this person can buy.

1 Samuelson, P. A., & Nordhaus, W. D. (2010). Economics (19th ed.). McGraw-Hill Education.

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 -At point B, when she spends all the money on Pepsi, she can buy 500 liters, but no
pizza at all.
- At point A, she can buy 100 pizzas without any liters of Pepsi.
- At point C, she can buy 50 pizzas and 250 liters of Pepsi.
=> This line AB: budget constraint. => ALL the points in this line are the bundles of goods
that she can afford.
The slope of the budget constraint measures the rate at which the consumer can trade one
good for the other. Remember that the slope between two points is calculated as the change in
the vertical distance divided by the change in the horizontal distance. The slope of the budget
constraint equals the relative price of the two goods—the price of one good compared to the
price of the other.
=> The slope is 5: Five liters of Pepsi per 1 pizza.
2.2. Utility
- Utility: an abstract measure of happiness or satisfaction that a consumer receives from a

bundle of goods. A consumer prefers one bundle of goods to another if one provides more

utility than the other (Mankiw, N. G., 2016 2). For example, if you consume a cup of coffee,

how much happiness you get from that coffee is the utility you have with that cup of coffee.

Besides the cup of coffee a little while ago, you also have a cup of tea, you prefer coffee so

drinking coffee is going to provide you with more utils of happiness than having tea.

Slices Total utility (utils) Marginal utility (utils) Description

0 0 When you eat no pizza, you have no utility

1 20 20 When you eat a slide of pizza, you have total twenty utils and the marginal utility is 20 utils

2 36 16

3 46 10

4 54 6

5 58 2 When you eat 5 slices, total utility increase to 58 utils but marginal utility decrease to 2 utils

6 51 -3 When you eat 6 slices, total utility decrease to 51 utils and marginal utility decrease to only -3
utils

- So look at the table about the total and marginal utility of eating slices of pizza (Principles

of Microeconomics, 20183): We can see a law that the more pizza you eat, the bigger total

utility is and the smaller marginal utility is. It is the Diminishing marginal utility referring to

the phenomenon that each additional unit of gain leads to an ever-smaller increase in

2 Mankiw, N. G. (2016). Principles of microeconomics (7th ed.). CENGAGE Learning Custom Publishing.
3 Principles of Microeconomics. (2018). Utility & marginal utility. YouTube. https://www.youtube.com/watch?
v=DRLS86XfHLg

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subjective value (Berkman et al., 2016 4). For instance, you really love pizza so 2 slices of

pizza give you more utility than 1 slice, but the sixth slide does not add much to the

experience beyond the fifth (and could even make it worse). If you consume too much of

some goods, your utility could decline because you lose your appetite.

2.3. Indifference Curves:

Utility and indifference curves are closely related and you can think of an indifference curve

as an "equal - utility" curve.

- Indifference curve: a curve that shows consumption bundles that give the consumer the

same level of satisfaction (Mankiw, N. G., 20165).

4 Berkman, E., Kahn, L., & Livingston, J. (2016). Valuation as a mechanism of Self-Control and ego depletion.
In Elsevier eBooks (pp. 255–279). https://doi.org/10.1016/b978-0-12-801850-7.00013-5
5 Mankiw, N. G. (2016). Principles of microeconomics (7th ed.). CENGAGE Learning Custom Publishing.

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- The marginal rate of substitution (MRS) measures the willingness of a consumer to replace

one good for another good, as long as the same satisfaction - or utility - is maintained (Hayes,

20246). For example, I am willing to give up an orange to consume 2 more apples. Therefore,

the MRS is 2.

- Indifference curves have 4 properties presenting a consumer’s preferences (Mankiw, N. G.,

20167):

+ Higher difference curves are preferred to lower ones because the higher ones illustrate

the more consumed products: the IC2 shows the higher satisfaction than the IC1

+ Indifference curves are downward sloping: if the quantity of one good is reduced, the

quantity of the other good must increase for the consumer to be equally happy.

6 Hayes, A. (2024, June 25). MRS in Economics: What it is and the formula for calculating it. Investopedia.
https://www.investopedia.com/terms/m/marginal_rate_substitution.asp
7 Mankiw, N. G. (2016). Principles of microeconomics (7th ed.). CENGAGE Learning Custom Publishing.

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 + Indifference curves do not cross because they represent different levels of satisfaction:

the consumer can not have the same utility at different quantities of goods and always

prefers more of both goods to less.

+ Indifference curves are bowed inward: the bowed shape of the indifference curve

reflects the consumer’s greater willingness to give up a good that she already has in

large quantity

- 2 extreme examples of indifference curves (Mankiw, N. G., 2016)

+ Perfect substitutes: 2 goods with straight-line indifference curves

you care only about the total monetary value. If so, you would always be willing to trade 2

nickels (5 cents) for 1 dime (10 cents), regardless of the number of nickels and dimes in the

bundle. Your marginal rate of substitution between nickels and dimes would be a fixed

number - 2.We can represent your preferences over nickels and dimes with the Perfect

substitutes

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 + Perfect complements: 2 goods with right-angle indifference curves

you care only about the number of pairs of shoes. In other words, you would judge a bundle

based on the number of pairs you could assemble from it. A bundle of 5 left shoes and 7 right

shoes yields only 5 pairs. Getting 1 more right shoe has no value if there is no left shoe to go

with it. We can represent your preferences for right and left shoes with the Perfect

complements

In the real world, of course, most goods are neither perfect substitutes nor perfect

complements

2.4. Income and Substitution Effects:

These effects are essential in understanding how a change in the price of a good influences
the consumer's choice.

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When the price of a good changes, two main effects come into play:

1. Substitution Effect:
- The change in consumption that results when a price change moves the consumer
along a given indifference curve to a point with a new marginal rate of substitution
- This directly affects the customer behavior, it shows that consumers are responsive to
relative prices and will adjust their consumption to maximize utility.
- For example, if the price of coffee rises from $3 to $4 per cup, many consumers who
regularly enjoyed coffee might start opting for tea instead, which costs $2 per cup.
This shift happens as they seek to maintain their caffeine intake while managing their
budgets, illustrating how price increases can lead to increased demand for cheaper
substitutes.

Relationship with Income effect:

- The substitution effect examines how price changes make some goods more or less
attractive to consumers.
- The income effect looks at how those price changes affect a consumer's overall ability
to purchase goods. Together, these effects explain changes in demand when prices
fluctuate.

2. Income Effect:
- First, I want to highlight the complex relationship between income and well-being. As
we all know, a higher income propels the insatiable consumer to reach a higher
indifference curve, allowing them to buy more goods without stress or anxiety. On
one hand, various researchers have found that income only correlates weakly with
individual well-being; continuous income does not necessarily lead to happier people
(Easterlin, 1974, 1995, 2001). On the other hand, a high income enables individuals in
modern societies to purchase expensive cars and enjoy luxurious leisure activities.

- For instance, consider a person who receives a significant salary increase. This
individual might decide to buy a luxury vehicle, which not only serves as a status
symbol but also enhances their daily commuting experience. While the new car may
bring temporary satisfaction, it does not guarantee long-term happiness.

- Moreover, studies indicate that countries with higher income levels generally report
higher average well-being (Diener et al., 1995; Inglehart, 1990). This suggests that
while individual happiness may not directly correlate with income, broader economic
prosperity can create environments that foster well-being through better services and
opportunities. Thus, the interplay between income and well-being remains a
noteworthy topic worthy of further exploration.
3. Case study

3.1. Shopee's "Shopee 25.12 Salary Big Sale"

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Shopee is a large e-commerce platform in Vietnam and Southeast Asia. In 2023, it led the Top 5 E-
commerce brands on social networks in December 2023. 8With the slogan "everything is available,
buy it all at Shopee" or "unbeatable cheap", it is easy to see that it hits the consumer psychology in
middle-income countries like Vietnam. Therefore, Shopee has many discounts and sales on holidays
and special days every month such as January 1, February 2... Let’s take a look at "Shopee 25.12
Salary Big Sale", which directly leverages the income and substitution effects, and which we
can visualize using the indifference curve.

- Income Effect: On this day, Shopee will launch a series of discount codes, free
shipping codes, and discounts on many products such as clothes, shoes, cosmetics,
household appliances... On this day, Shopee will launch a series of discount codes,
free shipping codes, and discounts on many products such as clothes, shoes,
cosmetics, household appliances... Discounts and promotions increase buyers' real
income by expanding the payment power of their currency. Therefore, it pushes them
to a higher indifference curve. As a result, people tend to buy additional items,
stretching their budget further for more satisfaction.
- Substitution Effect: Discounts make some products on Shopping Day more attractive
than others of the same type thanks to their cheaper prices. For example, on the
Shopee e-commerce platform, a red dress and a blue dress both cost 120,000 VND.
But on the discount day, the blue dress is only 100,000 VND, so consumers will
prioritize buying the blue dress and the blue dress will sell more. Thus, discounts
encourage consumers to replace these items with other cheaper items, moving along
the indifference curve in favor of discounted goods.

By the name"Shopee 25.12 Salary Big Sale", Shopee has emphasized to customers about
increasing the purchasing power of their income to stimulate demand for certain items and
increase visits and sales. Ultimately, consumers are drawn to purchase more than they
normally would, achieving higher satisfaction within their budget.

3.2. Case Study – Walmart Black Friday Deals and Indifference Curve

8 Brands Vietnam. (2024, February 2). YouNet Media Index: Bảng xếp hạng thương hiệu tháng
12/2023 . Accessed at 11:00 on the 15th November 2024 at
https://www.brandsvietnam.com/congdong/topic/338599-younet-media-index-bang-xep-hang-thuong-
hieu-thang-12-2023

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Presenter 1: "Now let’s apply this to Walmart’s Black Friday deals. Walmart’s strategy
targets essential and non-essential goods alike, showing how the income and substitution
effects come into play on the indifference curve:

1. Income Effect: Walmart’s deep discounts allow customers to afford more, effectively
shifting them to a higher indifference curve, where they achieve greater satisfaction
by purchasing both necessities and extra items.
2. Substitution Effect: With specific products discounted, customers substitute towards
these items over similar, non-discounted ones, staying on the same curve initially but
shifting their consumption preferences. This behavior results in a move towards
Walmart’s promoted products, ultimately raising overall satisfaction."

4. Summary and Conclusion

To summarize, we’ve seen how companies like Amazon and Walmart use promotions to
influence consumer behavior. By leveraging income and substitution effects, they impact
consumer preferences and choices as seen through the indifference curve. Promotions allow
consumers to feel wealthier, switch preferences, and reach a higher level of satisfaction
within their budget.

The indifference curve helps us visualize these choices and understand how companies can
use price changes to shape consumer behavior."

5. Minigame

Reference:

1. Berkman, E., Kahn, L., & Livingston, J. (2016). Valuation as a mechanism of Self-Control
and ego depletion. In Elsevier eBooks (pp. 255–279). https://doi.org/10.1016/b978-0-12-
801850-7.00013-5
2. Hayes, A. (2024). MRS in Economics: What it is and the formula for calculating it.
Investopedia. https://www.investopedia.com/terms/m/marginal_rate_substitution.asp
3. Mankiw, N. G. (2016). Principles of microeconomics (7th ed.). CENGAGE Learning Custom
Publishing.
4. Principles of Microeconomics. (2018). Utility & marginal utility. YouTube.
https://www.youtube.com/watch?v=DRLS86XfHLg
5. Ferrer-i-Carbonell, A. (2005). Income and well-being: an empirical analysis of the comparison income
effect. Journal of public economics, 89(5-6), 997-1019.