Presentation is loading. Please wait.

Presentation is loading. Please wait.

Consumer Behavior and Utility Maximization

Published bySarah Richardson Modified over 5 years ago

Similar presentations

Presentation on theme: "Consumer Behavior and Utility Maximization"— Presentation transcript:

1 Consumer Behavior and Utility Maximization
8 C H A P T E R Consumer Behavior and Utility Maximization

2 A Closer Look… THE LAW OF DEMAND The Income Effect
A lower price frees income for additional purchases - and vice versa The Substitution Effect A lower price relative to other goods attracts new buyers - and vice versa

3 LAW OF DIMINISHING MARGINAL UTILITY
Utility Defined Subjective Nature Difficult to Quantify Total Utility Marginal Utility graphically examined...

4 1 10 TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility,
Utils Marginal Utility, Utils 30 20 10 1 10 Total Utility (utils) Units consumed per meal 10 8 6 4 2 -2 Marginal Utility (utils) Units consumed per meal

5 1 10 10 TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total
Utils Marginal Utility, Utils 30 20 10 1 10 Total Utility (utils) 10 Units consumed per meal 10 8 6 4 2 -2 Marginal Utility (utils) Units consumed per meal

6 1 2 10 18 10 8 TOTAL AND MARGINAL UTILITY Tacos consumed per meal
Utils Marginal Utility, Utils 30 20 10 1 2 10 18 Total Utility (utils) 10 8 Units consumed per meal 10 8 6 4 2 -2 Marginal Utility (utils) Units consumed per meal

7 1 2 3 10 18 24 10 8 6 TOTAL AND MARGINAL UTILITY Tacos consumed
per meal Total Utility, Utils Marginal Utility, Utils 30 20 10 1 2 3 10 18 24 Total Utility (utils) 10 8 6 Units consumed per meal 10 8 6 4 2 -2 Marginal Utility (utils) Units consumed per meal

8 1 2 3 4 10 18 24 28 10 8 6 4 TOTAL AND MARGINAL UTILITY Tacos consumed
per meal Total Utility, Utils Marginal Utility, Utils 30 20 10 1 2 3 4 10 18 24 28 Total Utility (utils) 10 8 6 4 Units consumed per meal 10 8 6 4 2 -2 Marginal Utility (utils) Units consumed per meal

9 1 2 3 4 5 10 18 24 28 30 10 8 6 4 2 TOTAL AND MARGINAL UTILITY Tacos
consumed per meal Total Utility, Utils Marginal Utility, Utils 30 20 10 1 2 3 4 5 10 18 24 28 30 Total Utility (utils) 10 8 6 4 2 Units consumed per meal 10 8 6 4 2 -2 Marginal Utility (utils) Units consumed per meal

10 1 2 3 4 5 6 10 18 24 28 30 10 8 6 4 2 TOTAL AND MARGINAL UTILITY Tacos
consumed per meal Total Utility, Utils Marginal Utility, Utils 30 20 10 1 2 3 4 5 6 10 18 24 28 30 Total Utility (utils) 10 8 6 4 2 Units consumed per meal 10 8 6 4 2 -2 Marginal Utility (utils) Units consumed per meal

11 1 2 3 4 5 6 7 10 18 24 28 30 10 8 6 4 2 -2 TOTAL AND MARGINAL UTILITY
TU Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 30 20 10 1 2 3 4 5 6 7 10 18 24 28 30 Total Utility (utils) 10 8 6 4 2 -2 Units consumed per meal 10 8 6 4 2 -2 Marginal Utility (utils) MU Units consumed per meal

12 Observe Diminishing Marginal Utility
TOTAL AND MARGINAL UTILITY TU Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 30 20 10 Observe Diminishing Marginal Utility 1 2 3 4 5 6 7 10 18 24 28 30 Total Utility (utils) 10 8 6 4 2 -2 Units consumed per meal 10 8 6 4 2 -2 Marginal Utility (utils) MU Units consumed per meal

13 A Typical Consumer... Exhibits Rational Behavior
THEORY OF CONSUMER BEHAVIOR A Typical Consumer... Exhibits Rational Behavior Has Clear-Cut Preferences Subject to a Budget Constraint Responds to Price Changes

14 illustrated... Utility Maximizing Rule
THEORY OF CONSUMER BEHAVIOR Utility Maximizing Rule The consumer’s money income should be allocated so that the last dollar spent on each product yields the same amount of extra (marginal) utility illustrated...

15 How should the $10 Income be allocated?
UTILITY MAXIMIZING COMBINATION $ 10 income Product A: Price = $1 Product B: Price = $2 Marginal utility per dollar (MU/price) Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility, utils Unit of product First How should the $10 Income be allocated?

16 Examine the two marginal utilities
UTILITY MAXIMIZING COMBINATION $ 10 income Product A: Price = $1 Product B: Price = $2 Marginal utility per dollar (MU/price) Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility, utils Unit of product First Examine the two marginal utilities

17 Examine the two marginal utilities …per dollar
UTILITY MAXIMIZING COMBINATION $ 10 income Product A: Price = $1 Product B: Price = $2 Marginal utility per dollar (MU/price) Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility, utils Unit of product First Examine the two marginal utilities …per dollar

18 Decision: Buy 1 Product B for $2
UTILITY MAXIMIZING COMBINATION $ 10 income Product A: Price = $1 Product B: Price = $2 Marginal utility per dollar (MU/price) Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility, utils Unit of product First Decision: Buy 1 Product B for $2

19 What next? First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9
UTILITY MAXIMIZING COMBINATION $ 10 income Product A: Price = $1 Product B: Price = $2 Marginal utility per dollar (MU/price) Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility, utils Unit of product First Second Third Fourth Fifth Sixth Seventh What next?

20 What next? Buy one of each
UTILITY MAXIMIZING COMBINATION $ 10 income Product A: Price = $1 Product B: Price = $2 Marginal utility per dollar (MU/price) Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility, utils Unit of product First Second Third Fourth Fifth Sixth Seventh What next? Buy one of each

21 and then... ($5 left) First 10 10 24 12 Second 8 8 20 10
UTILITY MAXIMIZING COMBINATION $ 10 income Product A: Price = $1 Product B: Price = $2 Marginal utility per dollar (MU/price) Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility, utils Unit of product First Second Third Fourth Fifth Sixth Seventh and then... ($5 left)

22 third unit of product B First 10 10 24 12 Second 8 8 20 10
UTILITY MAXIMIZING COMBINATION $ 10 income Product A: Price = $1 Product B: Price = $2 Marginal utility per dollar (MU/price) Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility, utils Unit of product First Second Third Fourth Fifth Sixth Seventh third unit of product B

23 $3 left... First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9
UTILITY MAXIMIZING COMBINATION $ 10 income Product A: Price = $1 Product B: Price = $2 Marginal utility per dollar (MU/price) Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility, utils Unit of product First Second Third Fourth Fifth Sixth Seventh $3 left...

24 $3 left... Buy both! First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9
UTILITY MAXIMIZING COMBINATION $ 10 income Product A: Price = $1 Product B: Price = $2 Marginal utility per dollar (MU/price) Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility, utils Unit of product First Second Third Fourth Fifth Sixth Seventh $3 left... Buy both!

25 the last dollar spent on
UTILITY MAXIMIZING COMBINATION $ 10 income Product A: Price = $1 Product B: Price = $2 Marginal utility per dollar (MU/price) Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility, utils Unit of product First Second Third Fourth Fifth Sixth Seventh Income is gone... the last dollar spent on each good gave the same utility (8) per dollar

26 Algebraic Restatement of the Utility Maximization Rule
UTILITY MAXIMIZING COMBINATION Algebraic Restatement of the Utility Maximization Rule MU of product A Price of A MU of product B Price of B =

27 UTILITY MAXIMIZATION AND
THE DEMAND CURVE Deriving the Demand Schedule and Curve Given from the previous example schedule: Preferences or Tastes Money Income Prices of Other Goods

28 UTILITY MAXIMIZATION AND
THE DEMAND CURVE Deriving the Demand Schedule and Curve Create a demand schedule from the purchase decisions as the price of the product is varied ... Price per unit of B Quantity Demanded $ Graphically…

29 UTILITY MAXIMIZATION AND
THE DEMAND CURVE Deriving the Demand Schedule and Curve $2 Price per unit of Good B 1 DB 4 6 Quantity Demanded of Good B

30 UTILITY MAXIMIZATION AND
THE DEMAND CURVE Substitution Effects and Income Effects Revisited Deriving the Demand Schedule and Curve $2 Price per unit of Good B 1 DB 4 6 Quantity Demanded of Good B

31 Chapter Conclusions The Compact Disc Takeover
APPLICATIONS AND EXTENSIONS The Compact Disc Takeover The Diamond-Water Paradox The Value of Time Medical Care Purchases Cash and Noncash Gifts Chapter Conclusions

32 law of diminishing marginal utility rational behavior
KEY TERMS income effect substitution effect utility total utility marginal utility law of diminishing marginal utility rational behavior budget constraint utility-maximizing rule Copyright McGraw-Hill/Irwin 2002 BACK END

33 Next… Chapter 21 APPENDIX Indifference Curve Analysis

Download ppt "Consumer Behavior and Utility Maximization"

Similar presentations

Consumer Behavior and Utility Maximization

Consumer Behavior and Utility Maximization
21 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior.

Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior.
Prof. Ana Corrales ECO 2023 Notes Ch. 21: Consumer Behavior & Utility Maximization Why is the demand curve downward- sloping?  Income and Substitution.

Prof. Ana Corrales ECO 2023 Notes Ch. 21: Consumer Behavior & Utility Maximization Why is the demand curve downward- sloping?  Income and Substitution.
Slides prepared by Dr. Amy Peng, Ryerson University Part Two: Microeconomics of Product Markets CHAPTER 5 CONSUMER CHOICE AND UTILITY MAXIMIZATION.

Slides prepared by Dr. Amy Peng, Ryerson University Part Two: Microeconomics of Product Markets CHAPTER 5 CONSUMER CHOICE AND UTILITY MAXIMIZATION.
8 - 1 Copyright McGraw-Hill/Irwin, 2005 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.

8 - 1 Copyright McGraw-Hill/Irwin, 2005 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.
Objectives of chapter 3: A closer look at the law of demand Theory of consumer behavior Utility maximization and demand curve Chapter 3: Consumer Behavior.

Objectives of chapter 3: A closer look at the law of demand Theory of consumer behavior Utility maximization and demand curve Chapter 3: Consumer Behavior.
Elasticity Test Those students who have not completed their elasticity test must do so during the period. When completed, please submit with your name.

Elasticity Test Those students who have not completed their elasticity test must do so during the period. When completed, please submit with your name.
Consumer Behavior and Utility Maximization 21 C H A P T E R.

Consumer Behavior and Utility Maximization 21 C H A P T E R.
Utility and Demand CHAPTER 7. 2 After studying this chapter you will be able to Explain what limits a household’s consumption choices Describe preferences.

Utility and Demand CHAPTER 7. 2 After studying this chapter you will be able to Explain what limits a household’s consumption choices Describe preferences.
Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra,

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra,
CONSUMER BEHAVIOR AND UTILITY MAXIMIZATION Pertemuan 17 Matakuliah: J0114-Teori Ekonomi Tahun: 2009.

CONSUMER BEHAVIOR AND UTILITY MAXIMIZATION Pertemuan 17 Matakuliah: J0114-Teori Ekonomi Tahun: 2009.
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Consumer Behavior Chapter 7.

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Consumer Behavior Chapter 7.
Consumer Behavior 06 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Consumer Behavior 06 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Consumer Behavior 06 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Consumer Behavior 06 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Copyright 2008 The McGraw-Hill Companies 19 Consumer Behavior and Utility Maximization Click to Link to Appendix 19: Indifference Curve Analysis.

Copyright 2008 The McGraw-Hill Companies 19 Consumer Behavior and Utility Maximization Click to Link to Appendix 19: Indifference Curve Analysis.
Micro Chapter 19- Presentation 1. Law of Diminishing Marginal Utility Added satisfaction declines as a consumer acquires additional units of a given product.

Micro Chapter 19- Presentation 1. Law of Diminishing Marginal Utility Added satisfaction declines as a consumer acquires additional units of a given product.
The Rational Consumer. The income and substitution effects have been sacrificed… Their definitions are straight forward and in your book.

The Rational Consumer. The income and substitution effects have been sacrificed… Their definitions are straight forward and in your book.
n Individual’s demand curve: Why does it slopes downward? Why does it slopes downward? n Why do people demand goods and services? Receive satisfaction.

n Individual’s demand curve: Why does it slopes downward? Why does it slopes downward? n Why do people demand goods and services? Receive satisfaction.
Chapter 21: Consumer Choice

Chapter 21: Consumer Choice
Consumer Behavior Mr. Bammel. Law of Diminishing Marginal Utility  The principle that the added satisfaction declines as a consumer acquires additional.

Consumer Behavior Mr. Bammel. Law of Diminishing Marginal Utility  The principle that the added satisfaction declines as a consumer acquires additional.

Similar presentations

Ads by Google