1. Chapter 21: Consumer Choice
ECON 152 – PRINCIPLES OF MICROECONOMICS
Chapter 21:
Consumer Choice
Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.

2. Utility Theory Utility Utility Analysis Util
The want-satisfying power of a good or service
Utility Analysis
The analysis of consumer decision making based on utility maximization
Util
A representative unit by which utility is measured

3. Utility Theory Marginal Utility
The change in total utility due to a one-unit change in the quantity of a good or service consumed
Marginal utility =
change in total utility
change in number of units consumed

4. Total and Marginal Utility of Watching DVDs
Figure 20-1, Panel (a)

5. Total and Marginal Utility of Watching DVDs
Total utility is
maximized...
DVDs Watched per Week
Total Utility (utils per week) 1 2 3 4 5 6 7 8 10 12 14 16 18 20
Figure 20-1, Panels (b) and (c)
Marginal Utility (utils per week) 1 2 3 5 6 7 -4 -2 4 8 10
DVDs Watched per Week
…where marginal
utility equals zero.

6. Total and Marginal Utility of Watching Videos
Observations
Marginal utility falls as more is consumed
Marginal utility equals zero when total utility is at its maximum

7. Diminishing Marginal Utility
The principle that as more of any good or service is consumed, its extra benefit declines
Increases in total utility from consumption of a good or service become smaller and smaller as more is consumed during a given time period

8. Optimizing Consumption Choices
Consumer Optimum
A choice of a set of goods and services that maximizes the level of satisfaction for each consumer, subject to limited income

9. Total and Marginal Utility from Consuming DVDs and Pizza Slices on an Income of $26
Total Utility Marginal Utility
DVDs of DVDs per Marginal Utility per Dollar
per Period (utils) Spent (MUd/Pd)
Period (utils) MUd (Price = $5)
0 0.0 —— ——
Table 20-1

10. Total and Marginal Utility from Consuming DVDs and Pizza Slices on an Income of $26
Total Utility Marginal Utility
Pizza Slices of Pizza Slices Marginal Utility per Dollar
per per Period (utils) Spent (MUpPp)
Period (utils) MUp (price = $3)
0 0.0 —— ——
Table 20-1

11. Total and Marginal Utility from Consuming DVDs and Pizza Slices on an Income of $26
Marginal Utility Marginal Utility
Items per Dollar per Dollar
per Spent (DVD) Spent (Pizza)
Period (price = $5) (price = $3)
0 —— ——
Table 20-1

12. Steps to Consumer Optimum
Buying Decision Remaining Income
First DVD $26 - $5 = $21
Second DVD $21 - $5 = $16
First pizza slice $16 - $3 = $13
Third DVD $13 - $5 = $ 8
Fourth DVD and $8 - $5 = $ 3
Second pizza slice $3 - $3 = $ 0
Table 20-2

13. Optimizing Consumption Choices
A little math
The rule of equal marginal utilities per dollar spent
A consumer maximizes personal satisfaction when allocating money income in such a way that the last dollars spent on good A, good B, good C, and so on yield equal amounts of marginal utility

14. Optimizing Consumption Choices
A little math
The rule of equal marginal utilities per dollar spent
MU of good A
price of good A =
MU of good B
price of good B
MU of good Z
price of good Z
...

15. How a Price Change Affects Consumer Optimum
Income = $26
Qd = 4
MUd Pd
36.5 5 =
= 7.3
Qp = 2
MUp Pp 22 3 =
= 7.3

16. How a Price Change Affects Consumer Optimum
Assume Price of DVDs Falls to $4
Qd = 4
MUd Pd
36.5 4 =
= 9.13
Qp = 2
MUp Pp 22 3 =
= 7.3

17. How a Price Change Affects Consumer Optimum
Assume Price of DVDs Falls to $4
Now
MUd Pd
>
MUp Pp
Result
Buy more DVDs and MUd falls

18. DVD Rental Prices and Marginal Utility5
Price per Unit ($ per DVD)
Change “Video” to DVD B 4 1 2 3
Figure 20-2
DVD Rentals per Week

19. How a Price Change Affects Consumer Optimum
The Substitution Effect
The tendency of people to substitute cheaper commodities for more expensive commodities
Purchasing Power
The value of money for buying goods and services
Real-Income Effect
The change in people’s purchasing power that occurs when, other things being constant, the price of one good that they purchase changes

20. Chapter 21: Consumer Choice
ECON 152 – PRINCIPLES OF MICROECONOMICS
Chapter 21:
Consumer Choice
Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.

21. Indifference Curve Analysis
ECON 152 – PRINCIPLES OF MICROECONOMICS
Appendix E
Indifference Curve Analysis
Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.

22. Figure E-1 Combinations That Yield Equal Levels of Satisfaction

23. Figure E-2 Indifference Curves: Impossibility of an Upward Slope

24. Figure E-3 Implications of a Straight-Line Indifference Curve

25. Table E-1 Calculating the Marginal Rate of Substitution

26. Figure E-4 A Set of Indifference Curves

27. Figure E-5 The Budget Constraint

28. Figure E-6 Consumer Optimum

29. Deriving Demand Curve from Indifference Analysis
If the price of meals drops, the consumer can buy more. The Budget Constraint shifts outward along the meals axis. The new point of indifference will be at a higher quantity per week. Thus, lower P, higher QD.

30. Indifference Curve Analysis
ECON 152 – PRINCIPLES OF MICROECONOMICS
Appendix E
Indifference Curve Analysis
Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.