Chapter_7 - Chapter 7) Consumer Behavior and Utility...

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Chapter 7) Consumer Behavior and Utility Maximization Law of Diminishing Marginal Utility Law of diminishing marginal utility – added satisfaction declines as a consumer acquires additional units of a given product. In a specific span of time over which consumers’ tastes remain unchanged, consumers can obtain as much of a particular good or service as they can afford. The more of that product they obtain, the less they want still more of it. Terminology Utility: want-satisfying power The utility of a good or service is the satisfaction or pleasure one gets from consuming it. Utility and usefulness are not synonymous (Painting) Utility is subjective. The utility of a specific product may vary from person to person. Utility is difficult to quantify. We assume that people can measure satisfaction with units called utils. Total Utility and Marginal Utility Total Utility: the total amount of satisfaction or pleasure a person derives from consuming some specific quantity of a good or service Marginal utility: the extra satisfaction a consumer realizes from an additional unit of that product The change in total utility that results from the consumption of 1 more unit of a product. o Total utility reaches a maximum with the addition of the specific unit and then declines o Marginal utility remains positive but diminishes through the first specific units because total utility increases at a declining rate. o Marginal utility hits zero at some point. o Then becomes negative with the specific unit and beyond. Marginal Utility and Demand Law of diminishing marginal utility explains why the demand curve for a given product slopes downward If successive units of a good yield smaller and smaller amounts of marginal utility then the consumer will buy additional units of a product only If its price falls. Diminishing marginal utility supports the idea that price must decrease in order for quantity demanded to increase. Consumers behave in ways that make demand curves downward-sloping. Quick Review 7.1 1. Utility is the benefit or satisfaction a person receives from consuming a good or a service 2. The law of diminishing marginal utility indicates that gains in satisfaction become smaller as successive units of a specific products are consumed 3. diminishing marginal utility provides a simple rationale for the law of demand Theory of Consumer Behavior
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Chapter_7 - Chapter 7) Consumer Behavior and Utility...

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