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Chapter 7 - 9—7‘ CHAPTER 7 Law of diminishing marginal...

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Unformatted text preview: 9—7‘ CHAPTER 7 Law of diminishing marginal utility: added satisfaction declines as a consumer acquires additional units of a given product 0 Explains why the demand curve for a give product slopes downward; if Successive units of a good yield smaller and smaller amounts of marginal utility, then the consumer will buy additional units of a product only if its price falls Utility: want-satisfying power; the satisfaction or pleasure one gets from consuming a good or service 0 3 characteristics: I Utility and usefulness are not synonymous I Utility is subjective; may vary from person to person I Utility is difficult to quantify ' Utils-units of utility (imaginary units of satisfaction) Total utility: the total amount of satisfaction or pleasure a person derives from consuming some specific quantity of a good or service Marginal utility: the extra satisfaction a consumer realizes from an additional unit of that product; the change in total utility that results from consumption of 1 more unit of a product Theory of consumer behavior 0 They engage in rational behavior 0 Each consumer has clear-cut preferences for certain goods and services that are available in the market; buyers also have a good idea of how much marginal utility they will get from successive units of the various products they might purchase 0 Every consumer faces a budget constraint 0 Every good carries a price tag Utility-maximizing rule: the principle that to obtain the greatest utility, the consumer would allocate money income so that the last dollar spent on each good or service yields the same marginal utility o The consumer is in equilibrium and would be worse off—total utility would decline——if there were any alteration in the bundle of goods purchased, providing there is no change in taste, income, products, or prices 0 Ratios must be equal: MU of product A/ Price of A = MU of product B/ Price of B Consumer must exhaust available income If the equation is not fulfilled, then some reallocation of the consumer’s expenditures between A and B (from the low to the high marginal-utility—per- dollar—product) will increase the consumer’s total utility 0 Providing insights on the income effect and substitution effects of a price decline, the utility-maximization model helps explain why demand curves are down— sloping Basic determinants of demand 0 Preferences or tastes 0 Money income 0 The prices of other goods 00 Income effect: the impact that a change in the price of a product has on a consumer’s real income and consequently on the quantity demanded of that good Substitution effect: the impact that a change in a products price has on its relative expensiveness and consequently on the quantity demanded Diamond-Water paradox o The relative prices relate to marginal utility, not total utility The value of time 0 Full price of event == market price + worth of time Budget line: a line that shows the different combinations of two products a consumer can purchase with a specific money income given the product’s prices Indifference curve: a curve showing the different combinations of two products that yield the same satisfaction or utility to a consumer ...
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