1. Chapter 7
Consumer Behavior & Utility Maximization

2. Introduction
A. NO two consumers spend their incomes in the same way. How can this be explained? B. Why does a consumer buy a particular goods rather than others? C. Water VS. Diamond (Paradox of Value) Examining these issues will help us understand consumer behavior and the law of demand.

3. Utility Graphically ] Total Utility 1 2 3 4 5 6 7 10 18 24 28 30 10 810 20 30 8 6 4 2 -2 1 3 5 7
Total Utility (Utils)
Marginal Utility (Utils)
(1)
Tacos
Consumed
Per Meal
(2)
Total
Utility,
Utils
(3)
Marginal
Utility,
Utils TU 1 2 3 4 5 6 7 10 18 24 28 30 ] 10 8 6 4 2 -2
Units Consumed Per Meal
Marginal Utility MU
Units Consumed Per Meal
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4. Utility = Satisfaction
1. Utility Economics = Amount of satisfaction.
2. Marginal Utility (MU) = the extra utility a consumer gets from one additional unit of a product
3- Total Utility (TU) increases at a diminishing rate since each taco adds less and less to the consumer’s satisfaction. 
4. The law of diminishing marginal utility (MU) : Successive units of a product yield smaller and smaller amounts of MU.
 How about the law when Drug addiction comes to mind?
CONSIDER THIS … Vending Machines and Marginal Utility

5. Theory of Consumer Behavior
Marginal Utility Per Dollar/KD/Money:
Consumer Equilibrium: (how consumers allocate their income) 1- 2-
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6. Numerical Example
Combinations of apples and oranges obtainable with an income of $10
(2)
Apple (product A)
Price = $1
(3)
Orange (product B)
Price = $2
(b)
Marginal
Utility
Per Dollar
(MU/Price)
(a)
Marginal
Utility,
Utils
(1)
Unit of
Product
First
Second
Third
Fourth
Fifth
Sixth
Seventh 10 8 7 6 5 4 3 24 20 18 16 12 10 8 7 6 5 4 3 12 9 2
Final result – at these prices, purchase 2 apples and 4 oranges
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7. Deriving the Demand Curve
Price of Product B 1 2 4 6
Quantity Demanded of B
Price Per
Unit of B
Quantity
Demanded $2 4 1 6
Income Effects
Substitution Effects DB
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