chapter5

# chapter5 - 1 2009 2009-10 10-12 12 Chapter 5 Chapter 5...

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Unformatted text preview: 1 2009 2009-10 10-12 12 Chapter 5 Chapter 5 Demand Demand Key Key Determinants Determinants of Consumer of Consumer Behavior Behavior What factors influence how much of a good or service people buy? 1. 2. 3. 2 2009 2009-10 10-12 12 Preferences and Utility Preferences and Utility • Preferences: describe how much an individual values different goods and services. • Utility: the happiness/satisfaction an individual gets from consumption. • The unit of measurement is a util. • Measured indirectly, by observing consumers’ behavior. • Cannot be compared between people Utility Utility Pizza Slices 1 2 3 4 5 6 Total Utility 20 36 50 60 68 65 • Marginal utility : the additional utility you get from consuming an additional unit of a good. • Law of Diminishing Marginal Utility: marginal utility will start decreasing as consumption increases beyond some point. • Marginal Utility & Total Utility 3 2009 2009-10 10-12 12 The Budget Constraint The Budget Constraint • A budget constraint shows the limits of a household’s consumption. • Example: suppose you have \$10 to spend on party food. – Price of pizza=\$2/slice; Price of coke=\$1/can. – Is 1 slice of pizza and 1 can of coke affordable? – Are 4 slices of pizza and 4 cans of coke affordable? – What are all the possible combinations of pizza and coke that you can buy? Determine Demand Determine Demand • Goal: Maximize utility within budget constraint. • Consider two cases: – Consumer decision over one good – Consumer decision over two goods • Rational Spending Rule 4 2009 2009-10 10-12 12 Consumer Decision over One Good Consumer Decision over One Good Total Utility and Marginal Utility from Eating Pizza NUMBER OF SLICES OF PIZZA TOTAL UTILITY FROM EATING PIZZA MARGINAL UTILITY FROM THE LAST SLICE-- 1 20 20 2 36 16 3 50 14 4 60 10 5 68 8 6 7 65 60 3-5 If there is no budget constraint, how many slices should you order? What if you only have \$8 and the price of pizza is \$2 a slice?...
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chapter5 - 1 2009 2009-10 10-12 12 Chapter 5 Chapter 5...

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