Econ chapter 8

Econ chapter 8 - Chapter 8 The Logic of Individual Choice...

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Chapter 8- The Logic of Individual Choice: The Foundation of Supply and Demand Utility theory and Individual Choice -Economists think we need an easier underlying psychological foundation. People do what they do because its in their self-interest -Utility- pleasure or satisfaction people get from doing or consuming something, and price of doing or consuming that something. -price is tool market uses to bring quantity supplied equal to quantity demanded. -economists theory of rational choice- price and pleasure are related. -Total utility- total satisfaction one gets from consuming a product -marginal utility- satisfaction one gets from consuming one additional unit of a product above and beyond what one has consumed up to that point. -marginal utility shows up between the lines--- because it is the utility of changing consumption levels. -diminishing marginal utility- as you consume more of one good, after some point, the marginal utility received from each additional unit of a good decrease with each additional unit consumed, other things equal. -rational choice- analysis of how individuals choose goods within their budget in order to maximize total utility, and how maximizing total utility can be accomplished by considering marginal utility. -total utility is different from marginal Think of total as the amount you get from everything. Think of marginal as the additional satisfaction one gets… for example 56, not 60 -when the ratios of the marginal utility to price of the two goods are equal, you’re maximizing utility---UTILITY-MAXIMIZING RULE -when maximizing total utility, you’re in equilibrium. . MUx/Px=MUy/Py Law of demand- can be derived from principle of rational choice
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This note was uploaded on 11/23/2008 for the course ECON 201 taught by Professor Williams during the Fall '08 term at UVA.

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Econ chapter 8 - Chapter 8 The Logic of Individual Choice...

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