CONSUMER BEHAVIOR. UTILITY The satisfaction that consumption of a good or service provides.

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Consumer Behavior and Utility Maximization

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Presentation transcript:

CONSUMER BEHAVIOR

UTILITY The satisfaction that consumption of a good or service provides

DIMINISHING MARGINAL UTILITY As you consume additional units of a good, at some point each additional unit will begin providing less utility than the one before it.

UTILITY Total utility Total satisfaction from a specific quantity Marginal utility Extra satisfaction from an additional unit Law of diminishing marginal utility Explains downward sloping demand Why are newspaper vending machines different than pop machines? 7-4

GRAPHING 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 7-5 Let’s go to… How many tacos will you eat? What KEY piece of information are we missing?

THEORY OF CONSUMER BEHAVIOR Key dimensions of the consumer problem Rational behavior Preferences Budget constraint Prices 7-6

THEORY OF CONSUMER BEHAVIOR Find utility maximizing combination of goods Utility maximizing rule Allocate income Last dollar spent on each good yields same marginal utility Marginal utility per dollar What provides more utility to you, a Baconator or a JBC? Why might you still buy the JBC over the Baconator? 7-7

Numerical Example Combinations of apples and oranges obtainable with an income of $10 1. Compare marginal utilities 2. Then compare per dollar - MU/Price 3. Choose the highest 4. Check budget - proceed to next item 7-8

LET’S SPEND THE $10!

WHAT ABOUT AN $8 BUDGET??

$9???

ALGEBRAIC GENERALIZATION 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 7-12

PRACTICE