8 - 1 Copyright McGraw-Hill/Irwin, 2005 The Law of Demand Law of Diminishing Marginal Utility Total...
33
8 - 1 Copyright McGraw-Hill/Irwin, 2005 The Law of Dema nd Law of Diminish ing Marginal Ut ility Total and Margi nal Utility Theory of Consu mer Behavior Utility Maximiz ing Combination Utility Maximiz ation and the D emand Curve Applications an d Extensions Key Terms Previo us Slide Next Slid e End End Show Show Consumer Behavior and Utility Maximization 8 C H A P T E R
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Transcript of 8 - 1 Copyright McGraw-Hill/Irwin, 2005 The Law of Demand Law of Diminishing Marginal Utility Total...
8 - 1Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Consumer Behavior andUtility Maximization
8C H A P T E R
8 - 2Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
THE LAW OF DEMANDA Closer Look…
The Income Effect A lower price frees income for additional purchases - and vice versa
The Substitution Effect A lower price relative to other goods attracts new buyers - and vice versa
8 - 3Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
LAW OF DIMINISHINGMARGINAL UTILITY
• Utility Defined• Subjective Nature• Difficult to QuantifyTotal UtilityMarginal Utility
graphically examined...
8 - 4Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
TOTAL AND MARGINAL UTILITYTacos
consumedper meal
TotalUtility,Utils
MarginalUtility,Utils
01
010
Units consumed per meal
Units consumed per meal
30
20
10
To
tal
Uti
lity
(u
tils
)M
arg
ina
l U
tili
ty (
uti
ls)
10 8 6 4 2 0 -2
0 1 2 3 4 5 6 7
1 2 3 4 5 6 7
8 - 5Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
TOTAL AND MARGINAL UTILITYTacos
consumedper meal
TotalUtility,Utils
MarginalUtility,Utils
01
010 10
Units consumed per meal
Units consumed per meal
30
20
10
To
tal
Uti
lity
(u
tils
)M
arg
ina
l U
tili
ty (
uti
ls)
10 8 6 4 2 0 -2
0 1 2 3 4 5 6 7
1 2 3 4 5 6 7
8 - 6Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
TOTAL AND MARGINAL UTILITYTacos
consumedper meal
TotalUtility,Utils
MarginalUtility,Utils
012
01018
10 8
Units consumed per meal
Units consumed per meal
30
20
10
To
tal
Uti
lity
(u
tils
)M
arg
ina
l U
tili
ty (
uti
ls)
10 8 6 4 2 0 -2
0 1 2 3 4 5 6 7
1 2 3 4 5 6 7
8 - 7Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
TOTAL AND MARGINAL UTILITYTacos
consumedper meal
TotalUtility,Utils
MarginalUtility,Utils
0123
0101824
10 8 6
0 1 2 3 4 5 6 7
Units consumed per meal
Units consumed per meal
30
20
10
To
tal
Uti
lity
(u
tils
)M
arg
ina
l U
tili
ty (
uti
ls)
10 8 6 4 2 0 -2
1 2 3 4 5 6 7
8 - 8Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
TOTAL AND MARGINAL UTILITYTacos
consumedper meal
TotalUtility,Utils
MarginalUtility,Utils
01234
010182428
10 8 6 4 Units consumed per meal
Units consumed per meal
30
20
10
To
tal
Uti
lity
(u
tils
)M
arg
ina
l U
tili
ty (
uti
ls)
10 8 6 4 2 0 -2
0 1 2 3 4 5 6 7
1 2 3 4 5 6 7
8 - 9Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
TOTAL AND MARGINAL UTILITYTacos
consumedper meal
TotalUtility,Utils
MarginalUtility,Utils
012345
01018242830
10 8 6 4 2
Units consumed per meal
Units consumed per meal
30
20
10
To
tal
Uti
lity
(u
tils
)M
arg
ina
l U
tili
ty (
uti
ls)
10 8 6 4 2 0 -2
0 1 2 3 4 5 6 7
1 2 3 4 5 6 7
8 - 10Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
TOTAL AND MARGINAL UTILITYTacos
consumedper meal
TotalUtility,Utils
MarginalUtility,Utils
0123456
0101824283030
10 8 6 4 2 0
Units consumed per meal
Units consumed per meal
30
20
10
To
tal
Uti
lity
(u
tils
)M
arg
ina
l U
tili
ty (
uti
ls)
10 8 6 4 2 0 -2
0 1 2 3 4 5 6 7
1 2 3 4 5 6 7
8 - 11Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
TOTAL AND MARGINAL UTILITYTacos
consumedper meal
TotalUtility,Utils
MarginalUtility,Utils
01234567
010182428303028
10 8 6 4 2 0 -2
Units consumed per meal
Units consumed per meal
30
20
10
To
tal
Uti
lity
(u
tils
)M
arg
ina
l U
tili
ty (
uti
ls)
10 8 6 4 2 0 -2
TU
MU
0 1 2 3 4 5 6 7
1 2 3 4 5 6 7
8 - 12Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
TOTAL AND MARGINAL UTILITYTacos
consumedper meal
TotalUtility,Utils
MarginalUtility,Utils
01234567
010182428303028
10 8 6 4 2 0 -2
Units consumed per meal
Units consumed per meal
30
20
10
To
tal
Uti
lity
(u
tils
)M
arg
ina
l U
tili
ty (
uti
ls)
10 8 6 4 2 0 -2
TU
MU
0 1 2 3 4 5 6 7
1 2 3 4 5 6 7
ObserveDiminishing
MarginalUtility
8 - 13Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
THEORY OF CONSUMER BEHAVIOR
Consumer Choice and Budget Constraint• Rational Behavior• Clear-Cut Preferences• Subject to a Budget
Constraint• Responds to Price
Changes
8 - 14Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
THEORY OF CONSUMER BEHAVIOR
Utility Maximizing Rule
The consumer’s money income should be allocated so that the last dollar spent on each product yields the same amount of extra (marginal) utility.
illustrated...
8 - 15Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
First 10 10 24 12
$ 10 income
UTILITY MAXIMIZING COMBINATION
How should the $10 income be allocated?
Unit ofproduct
Product A:Price = $1
Product B:Price = $2
Marginalutility,utils
Marginalutility per
dollar(MU/price)
Marginalutility,utils
Marginalutility per
dollar(MU/price)
8 - 16Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
First 10 10 24 12
$ 10 income
UTILITY MAXIMIZING COMBINATION
Examine the twomarginal utilities
Unit ofproduct
Product A:Price = $1
Product B:Price = $2
Marginalutility,utils
Marginalutility per
dollar(MU/price)
Marginalutility,utils
Marginalutility per
dollar(MU/price)
8 - 17Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
First 10 10 24 12
$ 10 income
UTILITY MAXIMIZING COMBINATION
Examine the twomarginal utilities
…per dollar
Unit ofproduct
Product A:Price = $1
Product B:Price = $2
Marginalutility,utils
Marginalutility per
dollar(MU/price)
Marginalutility,utils
Marginalutility per
dollar(MU/price)
8 - 18Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
First 10 10 24 12
$ 10 income
UTILITY MAXIMIZING COMBINATION
Decision: Buy 1Product B for $2
Unit ofproduct
Product A:Price = $1
Product B:Price = $2
Marginalutility,utils
Marginalutility per
dollar(MU/price)
Marginalutility,utils
Marginalutility per
dollar(MU/price)
8 - 19Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
First 10 10 24 12Second 8 8 20 10Third 7 7 18 9Fourth 6 6 16 8Fifth 5 5 12 6Sixth 4 4 6 3Seventh 3 3 4 2
$ 10 income
UTILITY MAXIMIZING COMBINATION
What next?
Unit ofproduct
Product A:Price = $1
Product B:Price = $2
Marginalutility,utils
Marginalutility per
dollar(MU/price)
Marginalutility,utils
Marginalutility per
dollar(MU/price)
8 - 20Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
First 10 10 24 12Second 8 8 20 10Third 7 7 18 9Fourth 6 6 16 8Fifth 5 5 12 6Sixth 4 4 6 3Seventh 3 3 4 2
$ 10 income
UTILITY MAXIMIZING COMBINATION
What next?Buy one of each
Unit ofproduct
Product A:Price = $1
Product B:Price = $2
Marginalutility,utils
Marginalutility per
dollar(MU/price)
Marginalutility,utils
Marginalutility per
dollar(MU/price)
8 - 21Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
First 10 10 24 12Second 8 8 20 10Third 7 7 18 9Fourth 6 6 16 8Fifth 5 5 12 6Sixth 4 4 6 3Seventh 3 3 4 2
$ 10 income
UTILITY MAXIMIZING COMBINATION
and then...($5 left)
Unit ofproduct
Product A:Price = $1
Product B:Price = $2
Marginalutility,utils
Marginalutility per
dollar(MU/price)
Marginalutility,utils
Marginalutility per
dollar(MU/price)
8 - 22Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
First 10 10 24 12Second 8 8 20 10Third 7 7 18 9Fourth 6 6 16 8Fifth 5 5 12 6Sixth 4 4 6 3Seventh 3 3 4 2
$ 10 income
UTILITY MAXIMIZING COMBINATION
third unit of product B
Unit ofproduct
Product A:Price = $1
Product B:Price = $2
Marginalutility,utils
Marginalutility per
dollar(MU/price)
Marginalutility,utils
Marginalutility per
dollar(MU/price)
8 - 23Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
First 10 10 24 12Second 8 8 20 10Third 7 7 18 9Fourth 6 6 16 8Fifth 5 5 12 6Sixth 4 4 6 3Seventh 3 3 4 2
$ 10 income
UTILITY MAXIMIZING COMBINATION
$3 left...
Unit ofproduct
Product A:Price = $1
Product B:Price = $2
Marginalutility,utils
Marginalutility per
dollar(MU/price)
Marginalutility,utils
Marginalutility per
dollar(MU/price)
8 - 24Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
First 10 10 24 12Second 8 8 20 10Third 7 7 18 9Fourth 6 6 16 8Fifth 5 5 12 6Sixth 4 4 6 3Seventh 3 3 4 2
$ 10 income
UTILITY MAXIMIZING COMBINATION
$3 left...Buy both!
Unit ofproduct
Product A:Price = $1
Product B:Price = $2
Marginalutility,utils
Marginalutility per
dollar(MU/price)
Marginalutility,utils
Marginalutility per
dollar(MU/price)
8 - 25Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
First 10 10 24 12Second 8 8 20 10Third 7 7 18 9Fourth 6 6 16 8Fifth 5 5 12 6Sixth 4 4 6 3Seventh 3 3 4 2
$ 10 income
UTILITY MAXIMIZING COMBINATION
Income is gone...the last dollar spent on
each good gave the sameutility (8) per dollar
Unit ofproduct
Product A:Price = $1
Product B:Price = $2
Marginalutility,utils
Marginalutility per
dollar(MU/price)
Marginalutility,utils
Marginalutility per
dollar(MU/price)
8 - 26Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Algebraic Restatement of theUtility Maximization Rule
MU of product A
Price of A
MU of product B
Price of B=
UTILITY MAXIMIZING COMBINATION
8 Utils
$1
16 Utils
$2=
8 - 27Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
UTILITY MAXIMIZATION ANDTHE DEMAND CURVE
Deriving the Demand Schedule and Curve
• Preferences or Tastes• Money Income• Prices of Other Goods
Given from the previous example schedule:
8 - 28Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
UTILITY MAXIMIZATION ANDTHE DEMAND CURVE
Create a demand schedule from thepurchase decisions as the price of the product is varied ...
Price per unit of B Quantity Demanded
$2 4 1 6
Graphically…
Deriving the Demand Schedule and Curve
8 - 29Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
UTILITY MAXIMIZATION ANDTHE DEMAND CURVE
Deriving the Demand Schedule and Curve
Quantity Demanded of Good B
Pri
ce p
er u
nit
of
Goo
d B $2
1
0 4 6
DB
8 - 30Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
UTILITY MAXIMIZATION ANDTHE DEMAND CURVE
Deriving the Demand Schedule and Curve
Quantity Demanded of Good B
Pri
ce p
er u
nit
of
Goo
d B $2
1
0 4 6
DB
Income andSubstitution Effects
Revisited
8 - 31Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
APPLICATIONS AND EXTENSIONS
DVDs and DVD PlayersThe Diamond-Water
ParadoxThe Value of TimeMedical Care PurchasesCash and Noncash Gifts
income effectsubstitution effectutilitytotal utilitymarginal utilitylaw of diminishing marginal utilityrational behaviorbudget constraintutility-maximizing rule
ENDBACKCopyright McGraw-Hill/Irwin, 2005
8 - 33Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Next…
Indifference Curve Analysis
