Chapter 5 - Consumer choice -Individual and market demand

Chapter 5 - Consumer choice -Individual and market demand -...

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Chapter 5 Consumer Choice: Individual and Market Demand Everything is worth what its purchaser will pay for it. PUBLILIUS SYRUS
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Scarcity and Demand Demand – consumers Can pay Willing to pay Individual consumer Choices Constraint: income Income – scarce Purchase decision – interdependent 2
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Utility: Analyze Purchase Decisions Utility analysis How people behave Not what people think Money utility Measured Analyze demand behavior 3
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Utility: Analyze Purchase Decisions Total monetary utility - quantity of good Maximum amount of money Willing to give up All quantity Marginal monetary utility Maximum amount of money Willing to pay One more unit Addition to total utility 4
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Your total and marginal utility for pizza this month Table 1 5 (1) Quantity (Q) Pizzas per  Month (2) Total  Utility (TU) (3) Point in Marginal  Utility (MU)=( Δ TU/ Δ Q) (4) Figure 1 0 1 2 3 4 5 6 7 8 $0.00 15.00 28.00 40.50 52.00 60.00 65.00 68.00 68.00 $15.00 13.00 12.50 11.50 8.00 5.00 3.00 0.00 A B C D E F G H
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Utility: Analyze Purchase Decisions Law of diminishing marginal utility Additional units - worth less and less As individual’s consumption increases Marginal utility – declines Total utility – increases Very scarce good High marginal utility Little total utility Anomalies Increasing marginal utility 6
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A marginal utility (or demand) curve: your demand for pizza this month Figure 1 7 1 2 3 0 4 5 Number of Pizzas per Month 6 7 8 1 2 3 4 5 Marginal Utility (Price) per Pizza $16 6 15 7 8 9 10 11 12 13 14 G A C E F B H D P P
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Marginal Analysis Marginal analysis – method C alculate optimal choices B est promote the decision maker’s objective T est: If & By how much S mall change in decision M ove things toward/away from goal 8
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Finding your optimal pizza purchase quantity: maximizing total net utility Figure 2 9 -2 -1 0 1 2 Total Net Utility 3 4 5 6 7 8 $9 1 2 3 4 5 Number of Pizzas 6 M Total net utility hill
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Utility: Analyze Purchase Decisions Marginal net utility Marginal utility (MU) Minus price (P) If Positive MU>P; (MU-P)>0 Total net utility – uphill If Negative MU<P; (MU-P)<0 Total net utility – downhill 10
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Utility: Analyze Purchase Decisions Optimal purchase rule If MU>P Buy more If MU<P Buy less Maximize net total utility MU=P 11
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