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Unformatted text preview: Consumer Behavior and Utility Maximization CHAPTER TWENTY-ONE CONSUMER BEHAVIOR AND UTILITY MAXIMIZATION CHAPTER OVERVIEW This chapter may be omitted without damaging the continuity or understanding of the material in ensuing chapters. Those instructors who think it important to explain the law of demand on a more sophisticated level than that of previous chapters should assign this chapter. It may also be used as an enrichment chapter for brighter students. This chapter may be combined with Chapters 3 and 20. The law of demand is explained in terms of (1) the income and substitution effects and (2) diminishing marginal utility. The latter approach leads into a detailed discussion of the theory of consumer choice. The numerical illustrations of the utility-maximizing rule should be viewed as a pedagogical technique, rather than an attempt to portray the actual choice-making process of consumers. When this illustration is explained by order of purchase, the brief algebraic summary of consumer equilibrium should pose no great difficulties for most students. The discussion of the diamond-water paradox helps students look beyond what may be their first conclusions about the importance and value of products. The opportunity cost of time may be considered as a component of product price. This chapter concludes with a simplified integration of time into the theory of consumer behavior. The appendix to this chapter introduces indifference curve analysis for those intending to pursue further study in economics, or for those who desire a more rigorous explanation of consumer choice. This material is linked to the coverage provided in the rest of the chapter by using indifference curve analysis to develop an individuals demand curve for a product. WHATS NEW Much of the content of this chapter remains unchanged. Two Consider This boxes have been added, one in the body of the chapter, one in the appendix. The former applies the concept of diminishing marginal utility to vending machine behavior. The latter provides a nice analogy between topographical maps and indifference maps. Both boxes appeared in the website for the previous edition. Global perspective 21.1 was deleted. INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to 1. Define and distinguish between the income and substitution effects of a price change. 2. Explain why a consumer will buy more (less) of a commodity when its price falls (rises) by using the income and substitution effects. 3. Define marginal utility and state the law of diminishing marginal utility. 4. Explain how the law of diminishing marginal utility and price elasticity of demand are related....
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This note was uploaded on 10/14/2010 for the course STAT 2601 taught by Professor Jooin during the Spring '10 term at Camden County.
- Spring '10