Chapter 7 Micro - McConnell-Brue - Consumer Behavior

Chapter 7 Micro - McConnell-Brue - Consumer Behavior -...

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Economics 212 Principles of Microeconomics
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Chapter 7 Consumer Behavior and Utility Maximization
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I. Two Explanations Exist for the Law of Demand 1 st explanation: income and substitution effects 1. Income effect a. A lower price increases the purchasing power of money income. Thus, enabling a consumer to buy more of a product at a lower price. b. A higher price decreases the purchasing power of money income. Less amounts of the product will be purchased at a higher price.
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2. Substitution effect a. Lower prices give an incentive to substitute that lower priced good for another relatively high price good.
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2 nd explanation – Law of diminishing marginal utility 1. The more of a specific product consumers obtain, the less they will desire more units of that product.
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a. Utility – a subjective notion in economics, referring to the amount of satisfaction a person gets from the consumption of a certain item. i. cannot be quantified ii. use units of utility
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b. Total Utility – the total amount of satisfaction or pleasure a person derives from consuming some specific quantity of a good or service. c. Marginal Utility - refers to the extra utility a consumer gets from one additional unit of a specific product. i. at some point, Marginal Utility becomes zero, and then negative.
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d. The Law of Diminishing Marginal Utility – over a short period of time, the Marginal Utility derived from successive units of a given product will decline. Related to demand and elasticity
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i. Successive units of a product yield smaller and smaller amounts of marginal utility, so the consumer will buy more only if the price falls. - the demand curve is downward sloping, price and quantity are inversely related.
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If marginal utility falls sharply as successive units are consumed, demand is predicted to be inelastic. - a modest decline in
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This note was uploaded on 04/13/2008 for the course ECON 212 taught by Professor Hoffman during the Spring '07 term at UNL.

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Chapter 7 Micro - McConnell-Brue - Consumer Behavior -...

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