Section 2 Utlities

Section 2 Utlities - bundle” • Budget line Shows the...

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Section 2: Theoretical Foundations of Producer and Consumer Choice Consumer Purchasing Decisions Introduce theoretical concepts of consumer decision-making. These concepts will help illustrate the foundations of a demand curve (in product market) Key concept of demand is consumer “utility”- a word that describes the level of satisfaction a consumer derives from consumption of goods and services Marginal Utility Law of Diminishing Marginal Utility As additional amounts of a good (or service) are consumed, the amount of utility (satisfaction) derived from additional consumption diminishes So Where Does the Product Demand Curve Come from? With a basic understanding of utility, lets add two new features: o Limited Budget o More than one good Budget Constraint- The total income the consumer can spend on a “consumption
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Unformatted text preview: bundle” • Budget line- Shows the combination of goods that the consumer can purchase given budget constraint Optimal Marginal Rule Marginal Utility of x / dollar = Marginal Utility of y / dollar Why the Demand Curve is Downward Sloping • Substitution Effect- That results from a price change- the change in the quantity consumed of that good as consumer substitutes relatively cheaper good for the goods that became relatively more expensive • Income Effect- The results from a price change- change in the quantity consumed that results in an increase in the consumer’s purchasing power (a price increase/ decrease in effect make a consumer poorer / richer). Income effect is more pronounced for more expensive (larger share of budget) items....
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This note was uploaded on 03/30/2008 for the course AAEC 1006 taught by Professor Mjellerbrock during the Spring '07 term at Virginia Tech.

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