CH_07-Micro - Full Length Text - Part: 5 Micro Only Text -...

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To Accompany “Economics: Private and Public Choice 11th ed.” James Gwartney, Richard Stroup, Russell Sobel, & David Macpherson Slides authored and animated by: James Gwartney, David Macpherson, & Charles Skipton Full Length Text Micro Only Text Part: Part: Chapter: Chapter: Next page Copyright ©2006 Thomson Business and Economics. All rights reserved. 5 19 3 7
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Jump to first page Copyright ©2006 Thomson Business and Economics. All rights reserved.
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Jump to first page Copyright ©2006 Thomson Business and Economics. All rights reserved. Factors affecting choice: Limited income necessitates choice. Consumers make choices purposefully. One good can be substituted for another. Consumers must make decisions without perfect information, but knowledge and past experience will help. As the rate of consumption increases, the marginal utility derived from consuming additional units of a good will decline. Law of diminishing marginal utility :
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Jump to first page Copyright ©2006 Thomson Business and Economics. All rights reserved. The height of an individual's demand curve indicates the maximum price the consumer would be willing to pay for that unit. A consumer's willingness to pay for a unit of a good is directly related to the utility derived from consumption of the unit. The law of diminishing marginal utility implies that a consumer's marginal benefit, and thus the height of their demand curve, falls with the rate of consumption.
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Jump to first page Copyright ©2006 Thomson Business and Economics. All rights reserved. $2.00 Price Frozen pizzas per week $3.00 $3.50 MB 4 MB MB 2 MB 1 < < < MU 4 MU 3 MU 2 MU 1 < < < because d MB = • An individual’s demand curve, Jones’s demand for frozen pizzas in this case, reflects the law of diminishing marginal utility. • Because marginal utility ( MU ) falls with increased consumption, so does a consumer’s maximum willingness to pay -- marginal benefit ( MB ). • A consumer will purchase until MB = Price . . . so at $2.50 Jones would purchase 3 frozen pizzas and receive a consumer surplus shown by the shaded area (above the price line and below the demand curve). Price = $2.50 Jones’s demand curve for frozen pizza 4 2 1 3 MB 4 MB 3 MB 2 MB 1
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Jump to first page Copyright ©2006 Thomson Business and Economics. All rights reserved. Each consumer will maximize his/her satisfaction by ensuring that the last dollar spent on each commodity yields an equal degree of marginal utility. MU A P A = MU B P B = . . . = MU N P N
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Jump to first page Copyright ©2006 Thomson Business and Economics. All rights reserved. The demand curve shows the amount of a product consumers would be willing to buy at different prices for a specific period.
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CH_07-Micro - Full Length Text - Part: 5 Micro Only Text -...

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