ECON_2306 =&gt; Lecture 5 Slides

# ECON_2306 =&gt; Lecture 5 Slides - Utility L6A Consumer...

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1 L6A: Consumer Behavior and Utility Maximization Utility Maximization-Cardinal Measurement of Utility (Ch 8) (Ch 8) Utility Learned the relationship between price, quantity and total revenue, and the concept of elasticity Consumer behavior is import in understanding these concepts In order to understand the consumer behavior, we hl d f it d td t h t t h i lf Principles of Microeconomics, SP 20010 should first understand that the main goal of consumers is to maximize their utility or satisfaction Consumers intend to achieve the greatest satisfaction subject to their budget constraint . Cardinal Measurement of Utility Personal utility or satisfaction can be measured in exact units of measurement, called utils (as we measure temperature in degrees) Ed could say that he received 200 utils of satisfaction from a P.J. pizza and 50 utils of popcorn Principles of Microeconomics, SP 20010 Thus Ed received 4 times as much satisfaction from pizza as from a bag of popcorn This is a cardinal measurement Total and Marginal Utility Total utility is the total amount of satisfaction that the consumer obtains from a good or service. Marginal utility is the addition to total utility provided by another unit of a good or service. Suppose your utility is 1500 utils. Someone gives 2b f d lt tilit Principles of Microeconomics, SP 20010 you 2 bags of popcorn and as a result, your utility increases to 1600 utils. The marginal utility of a bag of popcorn is: Change in Total Utility/Change in Bags of Popcorn 100/2= 50 utils

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2 Two Explanations of the Law of Demand A. Income and substitution effects explain the inverse relationship between price and quantity demanded. The income effect is the impact of a change in price on consumers’ real incomes and consequently on the quantity of that product demanded. An increase in price means that less real income is available to buy subsequent amounts of the product. Principles of Microeconomics, SP 20010 The substitution effect is the impact of a change in a product’s price on its cost relative to other substitute products’ prices. A higher price for a particular product with no change in the prices of substitutes means that the item has become relatively more expensive compared to its substitutes. Therefore, consumers will buy less of this product and more of the substitutes, whose prices are relatively lower than before. Two Explanations of the Law of Demand B. The law of diminishing marginal utility is a second explanation of the downward sloping demand curve. The more of a specific product that consumers obtain, the less they will desire more units of that product. Automobile, houses, clothing, and food Principles of Microeconomics, SP 20010 1. Utility is a subjective notion in economics, referring to the amount of satisfaction a person gets from consumption of a certain item.
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## This note was uploaded on 04/15/2010 for the course ECON 2306 taught by Professor Bailiff during the Spring '08 term at UT Arlington.

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ECON_2306 =&gt; Lecture 5 Slides - Utility L6A Consumer...

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