Micro Chapter 19- Presentation 1

Law of Diminishing Marginal Utility Added satisfaction declines as a consumer acquires additional units of a given product The more the consumer obtains the less they want more of it Ex- cars (excluding collectors)

Law of Diminishing Marginal Utility Total Utility (Utils) Marginal Utility (Utils) (1) Tacos Consumed Per Meal (2) Total Utility, Utils (3) Marginal Utility, Utils ] ] ] ] ] ] ] TU MU Total Utility Marginal Utility Units Consumed Per Meal

Marginal Returns Video Diminishing Marginal Returns Video h4&feature=player_embedded h4&feature=player_embedded

Vending Machines Coke machine v. Newspaper machines Newspapers are open to take as many as you want but MU goes to almost zero- obsolete after a day Coke is buy one get one

Time Value of $$$ The value of money in the future, once interest has been considered Ex- 2 options: A)You could have $10,000 now or B) $10,000 3 years from now. Which is better? Present Value for both = $10,000 Future Value A = 10,000 + interest Future Value B = 10,000

Real World Example Original mortgage = $140,000 over 30 years at 6.375% interest (fixed rate) Payment: Principal and interest= $875 PMI= $68 Homeowner’s insurance = $62 Taxes= Total = x 360 = $480,002.40

Real World Example Original mortgage = $140,000 over 30 years at 6.375% interest (fixed rate) Payment: Principal and interest= $875 PMI= $68 Homeowner’s insurance = $62 Taxes= Total = x 360 = $480,002.40

Money Saved If I didn’t refinance… Still owe 26 years ( = $416,002.08) By refinancing: $416, – 225,900 = Savings of $190,102.08

Theory of Consumer Behavior The idea of diminishing marginal utility explains how consumers allocate their incomes among the many goods and services available for purchase

Assumptions of Consumer Choice 1. Rational Behavior- consumers are rational and try to use $$ to derive the greatest satisfaction 2. Preferences- each consumer has clear-cut preferences for certain goods/services and have a good idea of how much marginal utility they will get from additional units of a product

Assumptions of Consumer Choice Cont’d 3. Budget Constraints- at any point in time consumers have a fixed amount of money income 4. Prices- goods are scarce relative to the demand for them, so every good carries a price tag -people cannot buy everything they want

Utility Maximization Rule the last dollar spent on each product yields the same amount of marginal (extra) utility ***the consumer is in equilibrium and would be worse off (less total utility) if they altered purchases

Marginal Utility Per Dollar Used to make purchasing decisions (Marginal Utility/Price) = MU/price Choices are influenced by the MU that extra units of product A will yield but also by how many $$ (and how many units of alternative product B) must be given up to obtain added units of A

Utility Maximization Rule MU of product A/Price of A = MU of B/Price B If this equation is not true, then the consumer should reallocate their funds differently

Utility-Maximizing Combination of Products A and B Obtainable with an Income of $10 (1) Unit of Product (a) Marginal Utility, Utils (a) Marginal Utility, Utils (b) Marginal Utility Per Dollar (MU/Price) (b) Marginal Utility Per Dollar (MU/Price) (2) Product A: Price = $1 (3) Product B: Price = $2 First Second Third Fourth Fifth Sixth Seventh Compare Marginal Utilities Then Compare Per Dollar - MU/Price Choose the Highest Check Budget - Proceed to Next Item

(1) Unit of Product (a) Marginal Utility, Utils (a) Marginal Utility, Utils (b) Marginal Utility Per Dollar (MU/Price) (b) Marginal Utility Per Dollar (MU/Price) (2) Product A: Price = $1 (3) Product B: Price = $2 First Second Third Fourth Fifth Sixth Seventh Again, Compare Per Dollar - MU/Price Choose the Highest Buy One of Each – Budget Has $5 Left Proceed to Next Item

(1) Unit of Product (a) Marginal Utility, Utils (a) Marginal Utility, Utils (b) Marginal Utility Per Dollar (MU/Price) (b) Marginal Utility Per Dollar (MU/Price) (2) Product A: Price = $1 (3) Product B: Price = $2 First Second Third Fourth Fifth Sixth Seventh Again, Compare Per Dollar - MU/Price Buy One More B – Budget Has $3 Left Proceed to Next Item

` (1) Unit of Product (a) Marginal Utility, Utils (a) Marginal Utility, Utils (b) Marginal Utility Per Dollar (MU/Price) (b) Marginal Utility Per Dollar (MU/Price) (2) Product A: Price = $1 (3) Product B: Price = $2 First Second Third Fourth Fifth Sixth Seventh Again, Compare Per Dollar - MU/Price Buy One of Each – Budget Exhausted

Do the Math All $10 have been exhausted and the last dollar spent provides the same marginal utility (8 utils) 2 units of A ($2) + 4 units of B ($8) = $10 2 units of A = 18 utils + 4 units of B (78 utils) 96 utils