Chapter 5

Chapter 5 - Chapter 5 Consumer Choice: Individual and...

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Chapter 5 – Consumer Choice: Individual and Market Demand Scarcity and Demand Utility: A Tool To Analyze Purchase Decisions The Purpose of Utility Analysis: Analyzing How People Behave , Not What They Think Total Versus Marginal Utility o The total utility of a quantity of a good to a consumer (measured in money terms) is the maximum amount of money that he or she is willing to give up in exchange for it. o The marginal utility of a commodity to a consumer (measured in money terms) is the maximum amount of money that she or he is willing to pay for one more unit of that commodity. The “Law” of Diminishing Marginal Utility o The more of a good a consumer has, the less marginal utility an additional unit contributes to overall satisfaction, if all other things remain unchanged. o The “law” of diminishing marginal utility asserts that additional units of a commodity are worth less and less to a consumer in money terms. As the individual’s consumption increases, the marginal utility of each additional unit declines. o As a rule, as a person acquires more of a commodity, total utility increases and marginal utility from that good decreases, all other things being equal. In particular, when a commodity is very scarce, economists expect it to have a high marginal utility, even though it may provide little total utility because people have so little of the item. Using Marginal Utility: The Optimal Purchase Rule o Marginal analysis is a method for calculating optimal choices – the choices that best promote the decision maker’s objective. It works by testing whether, and by how much, a small change in a decision will move things toward or away from one goal. o
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This note was uploaded on 10/15/2008 for the course ECON 011 taught by Professor Yezer during the Fall '07 term at GWU.

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Chapter 5 - Chapter 5 Consumer Choice: Individual and...

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