Chapter05_H - 6E:001 Principles of Economics Spring, 2008...

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1 6E:001 Principles of Economics Spring, 2008 Chapter 5 – Consumer Choice Ch.5 2 Some things to look for { Two related but distinct questions: z How do consumers make choices? z How should we model that decision process? { It’s the total that matters, but getting there involves Marginal decisions. Ch.5 3 New Concepts { Monetary Utility { Marginal utility { Diminishing Marginal Utility { The optimal purchase rule: Marginal Monetary Utility = Price (approximately) { Individual Demand { Consumer Surplus { Market Demand is a “horizontal sum”
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2 Ch.5 4 Budget Allocation { $10 Pizza { $ 2 Ramen Noodles { $ 1 Soda { $10 Movie { $ 5 Newspaper { $10 Book { $30 Shirt { $ 5 Gym { $__ Savings { You have $40 in Pocket money for the weekend. How would you allocate it across the 8 items in the table? { What thought processes would guide your allocation Ch.5 5 How do economists model such decisions? { Optimization subject to constraints { Constraints are income, also prices and items to choose from { Objective is to maximize happiness, satisfaction, pleasure, … {
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Chapter05_H - 6E:001 Principles of Economics Spring, 2008...

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