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Theory of Consumer Behavior Mr. Henry AP Economics.

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Presentation on theme: "Theory of Consumer Behavior Mr. Henry AP Economics."— Presentation transcript:

1 Theory of Consumer Behavior Mr. Henry AP Economics

2 Review Mr. Lucot eats five slices of pizza on a Saturday night but admits each slice of pizza doesn’t taste as good as the previous one. This suggests that for Mr. Lucot: A The marginal utility of a slice of pizza is positive but decreasing B The marginal utility of a slice of pizza is negative C The total utility of slices of pizza is declining D The total utility of slices of pizza is increasing by larger and larger increments E The law of diminishing marginal utility does not hold for Mr. Lucot A The marginal utility of a slice of pizza is positive but decreasing

3 Typical Consumers… Have rational behavior (want to get “the most for their money”) aka maximize their total utility Each consumer has clear- cut preferences of the goods and services that are available in the market The consumer has a fixed, limited amount of money known as a budget constraint Every good carries a price and due to budget constraint, we cannot buy everything wanted.

4 Remember, to maximize satisfaction, the consumer should allocate his or her money income so that the last dollar spent on each product yields the same amount of extra (marginal) utility, called the utility-maximizing rule.

5 Adam Smith stated that the diamond-water paradox is the apparent contradiction that, although water is on the whole more useful, in terms of survival, than diamonds, diamonds command a higher price in the market. What are examples that you see of the Diamond-Water Paradox?

6 Time With consumer behavior, we must take into account TIME. Both consumption and production take time. Time is a valuable economic commodity! What are examples of times in your life when you have taken into account TIME when comparing 2 choices?

7 Cash and Noncash Gifts Marginal-utility analysis also helps us understand why people generally prefer cash gifts to noncash gifts costing the same amount. Can you name examples of times when you received a gift and would rather have the money?

8 Last Word: M&M’s

9 The theory of consumer behavior assumes that consumers attempt to maximize: A. the difference between total and marginal utility. B. total utility. C. average utility. D. marginal utility. B. Total utility

10 The law of diminishing marginal utility states that: A. total utility is maximized when consumers obtain the same amount of utility per unit of each product consumed. B. beyond some point additional units of a product will yield less and less extra satisfaction to a consumer. C. price must be lowered to induce firms to supply more of a product. D. it will take larger and larger amounts of resources beyond some point to produce successive units of a product. B.

11 The diamond-water paradox arises because: A. essential goods may be cheap while nonessential goods may be expensive. B. the marginal utility of certain products increases, rather than diminishes. C. essential goods are always higher priced than nonessential goods. D. we sometimes fail to use money as a standard of value. A. essential goods may be cheap while nonessential goods may be expensive.

12 Project Reminder


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