Microeconomics Chapter 6 Consumer Behavior Total Utility Marginal Utility & Diminishing Marginal Utility Utility Maximization Rule

Utility Defined “utility” is want-satisfying power. The utility of a g/s is the satisfaction or pleasure it provides to a consumer. Not a synonym for “usefulness” (ex: utility knife) Utility is subjective Difficult to quantify (we’ll call the measurement of utility “utils”) Total utility Marginal Utility—extra, additional, incremental Law of Diminishing Marginal Utility— beyond some point of consumption, utility will decline.

OR OR OR

Key Graph & Table Total and Marginal Utility

Marginal Utility and Demand The law of diminishing marginal utility explains why the demand curve slopes downward! What is the relationship between marginal utility and elasticity?? (hint: remember newspaper and soda vending machines.)

Theory of Consumer Behavior Assume the following for simplicity: Rational Behavior—consumers attempt to maximize their total utility. Preferences—each consumer has clear-cut preferences Budget Restraint—at any given time, a consumer has a fixed money income. Prices—individual consumers do not influence product price. Consumers can’t have it all (scarcity) and must make choices and compromises about the mix of goods and services—how do consumers optimize their choices??

Utility Maximizing Rule In order to reach equilibrium and maximize satisfaction (total utility), the consumer should allocate his or her money income (fixed budget) so that the last dollar spent on each product yields the same marginal utility. In order to compare utility derived from differently priced products, marginal utility must be stated on a per dollar basis: MU of A = MU of B ex: 8 > 2_ buy more/less P of A P of B $2 $1 of which?

Practice Question A consumer is spending all of her income and receiving 100 utils from the last unit of good A and 80 utils from the last unit of good B. If the price of good A is $2 and the price of good B is $1, to maximize total utility the consumer should buy A. more of good A. B. more of good B. C. less of good B. D. more of both goods. E. less of both goods. Answer: B

Diamond-Water Paradox Why are some “essential” goods priced lower than “unimportant” goods? The explanation lies in the utility maximizing rule: MU of water is low (so is its price) while MU of diamonds is high (so is its price.) Consumers will continue to gain satisfaction from additional water until it hits its low price. MU of water = MU of diamonds P of water P of diamonds