Copyright 2008 The McGraw-Hill Companies 19-1 Law of Diminishing Marginal Utility Theory of Consumer...
22
Copyright 2008 The McGraw-Hill Companies 19-1 Law of Dimi nishing Mar ginal Utili ty Theory of C onsumer Beh avior Deriving th e Demand Cu rve Application s and Exten sions Last Word Appendix Key Terms End Show 19 Consumer Behavior and Utility Maximization Click to Link to Appendix 19: Indifference Curve Analysis
-
Upload
steven-berry -
Category
Documents
-
view
214 -
download
0
Transcript of Copyright 2008 The McGraw-Hill Companies 19-1 Law of Diminishing Marginal Utility Theory of Consumer...
Copyright 2008 The McGraw-Hill Companies19-1
Law of Diminishing Marginal UtilityTheory of Consumer BehaviorDeriving the Demand CurveApplications and ExtensionsLast WordAppendix
Key Terms
End Show
19Consumer Behavior and Utility Maximization
Click to Link to Appendix 19: Indifference Curve Analysis
Copyright 2008 The McGraw-Hill Companies19-2
Law of Diminishing Marginal UtilityTheory of Consumer BehaviorDeriving the Demand CurveApplications and ExtensionsLast WordAppendix
Key Terms
End Show
Chapter Objectives• Total Utility, Marginal Utility, and the
Law of Diminishing Marginal Utility• How Rational Consumers Compare
Marginal Utility-to-Price Ratios for Products in Purchasing Combinations to Maximize Total Utility
• How to Derive the Demand Curve by Observing Behavior
• How the Utility-Maximization Model Highlights Income and Substitution Effects of a Price Change
• Budget Lines, Indifference Curves, Utility Maximization, and Demand Derivation in the Indifference Curve Model of Consumer Behavior
Copyright 2008 The McGraw-Hill Companies19-3
Law of Diminishing Marginal UtilityTheory of Consumer BehaviorDeriving the Demand CurveApplications and ExtensionsLast WordAppendix
Key Terms
End Show
Law of Diminishing Marginal Utility
• Terminology–Utility–Total Utility–Marginal Utility
• Marginal Utility and Demand
Graphically…
O 19.1
G 19.1
Copyright 2008 The McGraw-Hill Companies19-4
Law of Diminishing Marginal UtilityTheory of Consumer BehaviorDeriving the Demand CurveApplications and ExtensionsLast WordAppendix
Key Terms
End Show
Law of Diminishing Marginal Utility
0
10
20
30
1086420
-2
1 2 3 4 5 6 7
1 2 3 4 5 6 7
To
tal U
tilit
y (U
tils
)M
arg
inal
Uti
lity
(Uti
ls)
(1)Tacos
ConsumedPer Meal
(2)Total
Utility,Utils
(3)MarginalUtility,Utils
0
1
2
3
4
5
6
7
0
10
18
24
28
30
30
28
]]]]]]]
10
8
6
4
2
0
-2
TR
MU
Total Utility
Marginal Utility
Units Consumed Per Meal
Units Consumed Per Meal
Copyright 2008 The McGraw-Hill Companies19-5
Law of Diminishing Marginal UtilityTheory of Consumer BehaviorDeriving the Demand CurveApplications and ExtensionsLast WordAppendix
Key Terms
End Show
Theory of Consumer Behavior• Consumer Choice and
Budget Constraint–Rational Behavior–Preferences–Budget Constraint–Prices
• Utility Maximizing Rule–Allocate Money Income so
that Last Dollar Spent on Each Product Yields the Same Marginal Utility
Copyright 2008 The McGraw-Hill Companies19-6
Law of Diminishing Marginal UtilityTheory of Consumer BehaviorDeriving the Demand CurveApplications and ExtensionsLast WordAppendix
Key Terms
End Show
Theory of Consumer BehaviorNumerical Example:Utility-Maximizing Combination of Products A and B Obtainable with an Income of $10
(1)Unit of
Product
(a)MarginalUtility,Utils
(a)MarginalUtility,Utils
(b)Marginal
UtilityPer Dollar(MU/Price)
(b)Marginal
UtilityPer Dollar(MU/Price)
(2)Product A:Price = $1
(3)Product B:Price = $2
First
Second
Third
Fourth
Fifth
Sixth
Seventh
10
8
7
6
5
4
3
24
20
18
16
12
6
4
10
8
7
6
5
4
3
12
10
9
8
6
3
2
Compare Marginal UtilitiesThen Compare Per Dollar - MU/PriceChoose the HighestCheck Budget - Proceed to Next Item
Copyright 2008 The McGraw-Hill Companies19-7
Law of Diminishing Marginal UtilityTheory of Consumer BehaviorDeriving the Demand CurveApplications and ExtensionsLast WordAppendix
Key Terms
End Show
Theory of Consumer BehaviorNumerical Example:Utility-Maximizing Combination of Products A and B Obtainable with an Income of $10
(1)Unit of
Product
(a)MarginalUtility,Utils
(a)MarginalUtility,Utils
(b)Marginal
UtilityPer Dollar(MU/Price)
(b)Marginal
UtilityPer Dollar(MU/Price)
(2)Product A:Price = $1
(3)Product B:Price = $2
First
Second
Third
Fourth
Fifth
Sixth
Seventh
10
8
7
6
5
4
3
24
20
18
16
12
6
4
10
8
7
6
5
4
3
12
10
9
8
6
3
2
Again, Compare Per Dollar - MU/PriceChoose the HighestBuy One of Each – Budget Has $5 LeftProceed to Next Item
Copyright 2008 The McGraw-Hill Companies19-8
Law of Diminishing Marginal UtilityTheory of Consumer BehaviorDeriving the Demand CurveApplications and ExtensionsLast WordAppendix
Key Terms
End Show
Theory of Consumer BehaviorNumerical Example:Utility-Maximizing Combination of Products A and B Obtainable with an Income of $10
(1)Unit of
Product
(a)MarginalUtility,Utils
(a)MarginalUtility,Utils
(b)Marginal
UtilityPer Dollar(MU/Price)
(b)Marginal
UtilityPer Dollar(MU/Price)
(2)Product A:Price = $1
(3)Product B:Price = $2
First
Second
Third
Fourth
Fifth
Sixth
Seventh
10
8
7
6
5
4
3
24
20
18
16
12
6
4
10
8
7
6
5
4
3
12
10
9
8
6
3
2
Again, Compare Per Dollar - MU/PriceBuy One More B – Budget Has $3 LeftProceed to Next Item
Copyright 2008 The McGraw-Hill Companies19-9
Law of Diminishing Marginal UtilityTheory of Consumer BehaviorDeriving the Demand CurveApplications and ExtensionsLast WordAppendix
Key Terms
End Show
Theory of Consumer BehaviorNumerical Example:Utility-Maximizing Combination of Products A and B Obtainable with an Income of $10
(1)Unit of
Product
(a)MarginalUtility,Utils
(a)MarginalUtility,Utils
(b)Marginal
UtilityPer Dollar(MU/Price)
(b)Marginal
UtilityPer Dollar(MU/Price)
(2)Product A:Price = $1
(3)Product B:Price = $2
First
Second
Third
Fourth
Fifth
Sixth
Seventh
10
8
7
6
5
4
3
24
20
18
16
12
6
4
10
8
7
6
5
4
3
12
10
9
8
6
3
2
Again, Compare Per Dollar - MU/PriceBuy One of Each – Budget Exhausted
Copyright 2008 The McGraw-Hill Companies19-10
Law of Diminishing Marginal UtilityTheory of Consumer BehaviorDeriving the Demand CurveApplications and ExtensionsLast WordAppendix
Key Terms
End Show
Theory of Consumer BehaviorNumerical Example:Utility-Maximizing Combination of Products A and B Obtainable with an Income of $10
(1)Unit of
Product
(a)MarginalUtility,Utils
(a)MarginalUtility,Utils
(b)Marginal
UtilityPer Dollar(MU/Price)
(b)Marginal
UtilityPer Dollar(MU/Price)
(2)Product A:Price = $1
(3)Product B:Price = $2
First
Second
Third
Fourth
Fifth
Sixth
Seventh
10
8
7
6
5
4
3
24
20
18
16
12
6
4
10
8
7
6
5
4
3
12
10
9
8
6
3
2
Final Result – At These Prices, Purchase 2 of Item A and 4 of B W 19.1
Copyright 2008 The McGraw-Hill Companies19-11
Law of Diminishing Marginal UtilityTheory of Consumer BehaviorDeriving the Demand CurveApplications and ExtensionsLast WordAppendix
Key Terms
End Show
Theory of Consumer BehaviorAlgebraic Restatement:
MU of Product A
Price of A
MU of Product B
Price of B=
8 Utils
$1
16 Utils
$2=
Optimum Achieved - Money Income is Allocated so that the Last Dollar Spent on Each Product Yields the
Same Extra or Marginal Utility
Copyright 2008 The McGraw-Hill Companies19-12
Law of Diminishing Marginal UtilityTheory of Consumer BehaviorDeriving the Demand CurveApplications and ExtensionsLast WordAppendix
Key Terms
End Show
Pri
ce
of
Pro
du
ct
B
0
1
2
4 6
Quantity Demanded of B
Deriving the Demand CurveSame Numeric Example:
$2
1
4
6
Price Per Unit of B
QuantityDemanded
DBIncome Effects
Substitution EffectsO 19.2
Copyright 2008 The McGraw-Hill Companies19-13
Law of Diminishing Marginal UtilityTheory of Consumer BehaviorDeriving the Demand CurveApplications and ExtensionsLast WordAppendix
Key Terms
End Show
Applications and Extensions
• DVDs and DVD Players
• The Diamond-Water
Paradox
• The Value of Time
• Medical Care Purchases
• Cash and Noncash Gifts
O 19.3
Copyright 2008 The McGraw-Hill Companies19-14
Law of Diminishing Marginal UtilityTheory of Consumer BehaviorDeriving the Demand CurveApplications and ExtensionsLast WordAppendix
Key Terms
End Show
Criminal Behavior
• Economic Analysis Offers Insights Into Property Crimes Such as Robbery, Burglary, and Auto Theft
• Theory of a Rational Consumer• Buy Versus Steal Decision• Compare Marginal Utility of
Item Versus Costs – Guilt, Fines, or Prison Time
• Crime May Be Reduced by “Increasing” the “Price of Crime”
Last
Word
Copyright 2008 The McGraw-Hill Companies19-15
Law of Diminishing Marginal UtilityTheory of Consumer BehaviorDeriving the Demand CurveApplications and ExtensionsLast WordAppendix
Key Terms
End Show
Key Terms• law of diminishing marginal utilit
y• utility• total utility• marginal utility• rational behavior• budget constraint• utility-maximizing rule• income effect• substitution effect
Copyright 2008 The McGraw-Hill Companies19-16
Law of Diminishing Marginal UtilityTheory of Consumer BehaviorDeriving the Demand CurveApplications and ExtensionsLast WordAppendix
Key Terms
End Show
Next Chapter Preview…
The Costs ofProduction
Click to Link to Appendix 19: Indifference Curve Analysis
Copyright 2008 The McGraw-Hill Companies19-17
Law of Diminishing Marginal UtilityTheory of Consumer BehaviorDeriving the Demand CurveApplications and ExtensionsLast WordAppendix
Key Terms
End Show
Indifference Curve Analysis• Budget Line (Constraint)
–Income Changes–Price Changes
Return to Chapter 19
2 4 6 8 10 12
Qu
anti
ty o
f A
6
8
10
12
4
2
0
Quantity of B
Units of A(Price = $1.50)
Units of B(Price = $1)
TotalExpenditure
8
6
4
2
0
0
3
6
9
12
$12
12
12
12
12(Attainable)
(Unattainable)
Income = $12PA = $1.50
Income = $12PB = $1
Appendix
Indifference Curve AnalysisDemand CurveAppendix Terms
Copyright 2008 The McGraw-Hill Companies19-18
Law of Diminishing Marginal UtilityTheory of Consumer BehaviorDeriving the Demand CurveApplications and ExtensionsLast WordAppendix
Key Terms
End Show
Indifference Curve Analysis• What is Preferred
– Downsloping– Convex to Origin– Marginal Rate of Substitution
(MRS)
Return to Chapter 19
2 4 6 8 10 12
Qu
anti
ty o
f A
6
8
10
12
4
2
0
Quantity of B
Combination Units of A Units of B
j
k
l
m
12
6
4
3
2
4
6
8
j
k
lm
O 19.4
I
Appendix
Indifference Curve AnalysisDemand CurveAppendix Terms
Copyright 2008 The McGraw-Hill Companies19-19
Law of Diminishing Marginal UtilityTheory of Consumer BehaviorDeriving the Demand CurveApplications and ExtensionsLast WordAppendix
Key Terms
End Show
Indifference Curve Analysis• The Indifference Map• Equilibrium Position at Tangency
Return to Chapter 19
2 4 6 8 10 12
Qu
anti
ty o
f A
6
8
10
12
4
2
0
Quantity of B
I1
I2
I3
I4
X
WPreferred – But RequiresMore Income
MRS = PB
PA
Appendix
Indifference Curve AnalysisDemand CurveAppendix Terms
Copyright 2008 The McGraw-Hill Companies19-20
Law of Diminishing Marginal UtilityTheory of Consumer BehaviorDeriving the Demand CurveApplications and ExtensionsLast WordAppendix
Key Terms
End Show
Derivation of the Demand Curve• Measurement of Utility
Pri
ce o
f B
$1.50
1.00
.50
1 2 3 4 5 6 7 8 9 101112Quantity of B
Marginal Utilityof A
Marginal Utilityof B
Price of A Price of B=
X
2 4 6 8 10 12
Qu
anti
ty o
f A
6
8
10
12
4
2
0
Quantity of B
I2
I3
DB
At $1 Price for B, 6 Units are PurchasedRecord the ResultsAs Price of B Increases to $1.50,Only 3 Units of B are BoughtRecord the ResultsConnect the Points toCreate the Demand Curve
Appendix
Return to Chapter 19
Indifference Curve AnalysisDemand CurveAppendix Terms
Copyright 2008 The McGraw-Hill Companies19-21
Law of Diminishing Marginal UtilityTheory of Consumer BehaviorDeriving the Demand CurveApplications and ExtensionsLast WordAppendix
Key Terms
End Show
Appendix Key Terms
• budget line
• indifference curve
• marginal rate of substitution (MRS)
• indifference map
• equilibrium position
Return to Chapter 19
Appendix
Indifference Curve AnalysisDemand CurveAppendix Terms
Copyright 2008 The McGraw-Hill Companies19-22
Law of Diminishing Marginal UtilityTheory of Consumer BehaviorDeriving the Demand CurveApplications and ExtensionsLast WordAppendix
Key Terms
End Show
Next Chapter Preview…
The Costs ofProduction
Return to Chapter 19
Indifference Curve AnalysisDemand CurveAppendix Terms
