2. 21 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility Maximizing Combination Utility Maximization and the Demand Curve Applications and Extensions Key Terms Previous Slide Next Slide End Show Consumer Behavior and Utility Maximization 21 C H A P T E R

3. 21 - 2 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility Maximizing Combination Utility Maximization and the Demand Curve Applications and Extensions Key Terms Previous Slide Next Slide End Show LAW OF DIMINISHING MARGINAL UTILITY Utility Defined Subjective Nature Difficult to Quantify Total Utility Marginal Utility graphically examined...

4. 21 - 3 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility Maximizing Combination Utility Maximization and the Demand Curve Applications and Extensions Key Terms Previous Slide Next Slide End Show TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0123456701234567 0 10 18 24 28 30 28 10 8 6 4 2 0 -2 Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 TU MU 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7 Observe Diminishing Marginal Utility

5. 21 - 4 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility Maximizing Combination Utility Maximization and the Demand Curve Applications and Extensions Key Terms Previous Slide Next Slide End Show THEORY OF CONSUMER BEHAVIOR A Typical Consumer... Exhibits Rational Behavior Has Clear-Cut Preferences Subject to a Budget Constraint Responds to Price Changes

6. 21 - 5 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility Maximizing Combination Utility Maximization and the Demand Curve Applications and Extensions Key Terms Previous Slide Next Slide End Show THEORY OF CONSUMER BEHAVIOR Utility Maximizing Rule The consumers money income should be allocated so that the last dollar spent on each product yields the same amount of extra (marginal) utility illustrated...

7. 21 - 6 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility Maximizing Combination Utility Maximization and the Demand Curve Applications and Extensions Key Terms Previous Slide Next Slide End Show First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 Fifth 5 5 12 6 Sixth 4 4 6 3 Seventh 3 3 4 2 Unit of product $ 10 income Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price) UTILITY MAXIMIZING COMBINATION Income is gone... the last dollar spent on each good gave the same utility (8) per dollar

8. 21 - 7 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility Maximizing Combination Utility Maximization and the Demand Curve Applications and Extensions Key Terms Previous Slide Next Slide End Show Algebraic Restatement of the Utility Maximization Rule MU of product A Price of A MU of product B Price of B = UTILITY MAXIMIZING COMBINATION

9. 21 - 8 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility Maximizing Combination Utility Maximization and the Demand Curve Applications and Extensions Key Terms Previous Slide Next Slide End Show UTILITY MAXIMIZATION AND THE DEMAND CURVE Deriving the Demand Schedule and Curve Preferences or Tastes Money Income Prices of Other Goods Given from the previous example schedule:

10. 21 - 9 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility Maximizing Combination Utility Maximization and the Demand Curve Applications and Extensions Key Terms Previous Slide Next Slide End Show UTILITY MAXIMIZATION AND THE DEMAND CURVE Create a demand schedule from the purchase decisions as the price of the product is varied... Price per unit of B Quantity Demanded $24 16 Graphically… Deriving the Demand Schedule and Curve

11. 21 - 10 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility Maximizing Combination Utility Maximization and the Demand Curve Applications and Extensions Key Terms Previous Slide Next Slide End Show UTILITY MAXIMIZATION AND THE DEMAND CURVE Deriving the Demand Schedule and Curve Quantity Demanded of Good B Price per unit of Good B $2 1 0 4 6 DBDB

12. 21 - 11 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility Maximizing Combination Utility Maximization and the Demand Curve Applications and Extensions Key Terms Previous Slide Next Slide End Show UTILITY MAXIMIZATION AND THE DEMAND CURVE Deriving the Demand Schedule and Curve Quantity Demanded of Good B Price per unit of Good B $2 1 0 4 6 DBDB Substitution Effects and Income Effects Revisited

13. 21 - 12 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility Maximizing Combination Utility Maximization and the Demand Curve Applications and Extensions Key Terms Previous Slide Next Slide End Show APPLICATIONS AND EXTENSIONS The Compact Disc Takeover The Diamond-Water Paradox The Value of Time Medical Care Purchases Cash and Noncash Gifts Chapter Conclusions