23MeierPP07_18e - Chapter 7 Chapter Consumer Behavior and...

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Unformatted text preview: Chapter 7 Chapter Consumer Behavior and Choice LAW OF DEMAND LAW • As Price Falls… …Quantity Demanded Rises • As Price Rises… …Quantity Demanded Falls Question... Question... What is the rationale What behind the law of demand? behind Reasons Reasons • Substitution effect of a price change • Income (real) effect of a price change • Diminishing marginal utility SUBSTITUTION EFFECT SUBSTITUTION OF A PRICE CHANGE If the price of beef falls, If you can always eat more beef and less poultry. beef If the price of beef rises, If you can substitute poultry for beef. for INCOME (REAL) EFFECT INCOME OF A PRICE CHANGE If the price of a product falls, your real income rises as a result – you buy more. as If the price of a product rises, your real income falls as a result – you buy less. as DIMINISHING MARGINAL UTILITY UTILITY As you consume more, As your enjoyment for each additional unit will tend to fall. To get consumers to buy more with falling marginal utility, the price must fall. utility, TOTAL & MARGINAL UTILITY TOTAL Utility – enjoyment or satisfaction Total utility – the total enjoyment for all the units Marginal Utility – the change in total utility (additional utility) Total and Marginal Utility Total 0 1 2 3 4 5 6 7 0 10 Total Utility (utils) Hamburgers Total consumed Utility per meal Marginal utility ∆ (2) 30 20 10 TU 0 Marginal Utility (utils) 1 2 3 4 5 6 7 Units consumed per meal 10 8 6 4 2 0 -2 1 2 3 4 5 6 Units consumed per meal 7 MU Total and Marginal Utility Total 0 1 2 3 4 5 6 7 0 10 Total Utility (utils) Hamburgers Total consumed Utility per meal Marginal utility ∆ (2) 30 20 10 TU 10 0 Marginal Utility (utils) 1 2 3 4 5 6 7 Units consumed per meal 10 8 6 4 2 0 -2 1 2 3 4 5 6 Units consumed per meal 7 MU Total and Marginal Utility Total 0 1 2 3 4 5 6 7 0 10 18 Total Utility (utils) Hamburgers Total consumed Utility per meal Marginal utility ∆ (2) 30 20 10 TU 10 8 0 Marginal Utility (utils) 1 2 3 4 5 6 7 Units consumed per meal 10 8 6 4 2 0 -2 1 2 3 4 5 6 Units consumed per meal 7 MU Total and Marginal Utility Total 0 1 2 3 4 5 6 7 0 10 18 24 Total Utility (utils) Hamburgers Total consumed Utility per meal Marginal utility ∆ (2) 30 20 10 TU 10 8 6 0 Marginal Utility (utils) 1 2 3 4 5 6 7 Units consumed per meal 10 8 6 4 2 0 -2 1 2 3 4 5 6 Units consumed per meal 7 MU Total and Marginal Utility Total 0 1 2 3 4 5 6 7 0 10 18 24 28 Total Utility (utils) Hamburgers Total consumed Utility per meal Marginal utility ∆ (2) 30 20 10 TU Marginal Utility (utils) 10 8 6 4 0 1 2 3 4 5 6 7 Units consumed per meal 10 8 6 4 2 0 -2 1 2 3 4 5 6 Units consumed per meal 7 MU Total and Marginal Utility Total 0 1 2 3 4 5 6 7 0 10 18 24 28 30 Total Utility (utils) Hamburgers Total consumed Utility per meal Marginal utility ∆ (2) 30 20 10 TU Marginal Utility (utils) 10 8 6 4 2 0 1 2 3 4 5 6 7 Units consumed per meal 10 8 6 4 2 0 -2 1 2 3 4 5 6 Units consumed per meal 7 MU Total and Marginal Utility Total 0 1 2 3 4 5 6 7 0 10 18 24 28 30 30 Total Utility (utils) Hamburgers Total consumed Utility per meal Marginal utility ∆ (2) 30 20 10 TU Marginal Utility (utils) 10 8 6 4 2 0 0 1 2 3 4 5 6 7 Units consumed per meal 10 8 6 4 2 0 -2 1 2 3 4 5 6 Units consumed per meal 7 MU Total and Marginal Utility Total 0 1 2 3 4 5 6 7 0 10 18 24 28 30 30 28 Total Utility (utils) Hamburgers Total consumed Utility per meal Marginal utility ∆ (2) 30 20 10 TU Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 Units consumed per meal 10 8 6 4 2 0 -2 1 2 3 4 5 6 Units consumed per meal 7 MU Total and Marginal Utility Total Total Utility (utils) Hamburgers Total consumed Utility per meal Marginal utility ∆ (2) 30 20 10 TU 0 1 2 3 4 5 6 7 0 10 18 24 28 30 30 28 Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 Observe Diminishing Marginal Utility 2 3 4 5 6 7 Units consumed per meal 10 8 6 4 2 0 -2 1 2 3 4 5 6 Units consumed per meal 7 MU MARGINAL UTILITY AND DEMAND DEMAND As Q ↑, MU ↓. Thus, for Q MU Thus, to ↑ more, P must ↓. MU MU Q P Demand Q Utility Maximizing Rule Utility The consumer’s money The income should be allocated so that the last dollar spent on each product purchased yields the same amount of extra (marginal) utility. extra Movie or Concert Movie Rating scale: 1 – 100 Movie: 28 Concert: 90 Prices: Movie: $7 Concert: $45 Which should you attend? Answer... Answer... You should attend the You movie. Why? The marginal utility per dollar is higher than the concert. 28/$7 = 4 90/$45 = 2 90/$45 $ 10 income Unit of product Product A: Price = $1 Product B: Price = $2 Marginal Marginal Marginal utility per Marginal utility per dollar dollar utility, utility, (MU/price) (MU/price) utils utils First 10 10 24 12 How should the $10 income be allocated? $ 10 income Unit of product Product A: Price = $1 Product B: Price = $2 Marginal Marginal Marginal utility per Marginal utility per dollar dollar utility, utility, (MU/price) (MU/price) utils utils First 10 10 24 12 Examine the two marginal utilities $ 10 income Unit of product Product A: Price = $1 Product B: Price = $2 Marginal Marginal Marginal utility per Marginal utility per dollar dollar utility, utility, (MU/price) (MU/price) utils utils First 10 10 24 12 Examine the two marginal utilities Per Dollar... $ 10 income Unit of product Product A: Price = $1 Product B: Price = $2 Marginal Marginal Marginal utility per Marginal utility per dollar dollar utility, utility, (MU/price) (MU/price) utils utils First 10 10 24 12 Examine the two marginal utilities Decision: Buy 1 Product B for $2 $ 10 income Unit of product Product A: Price = $1 Product B: Price = $2 Marginal Marginal Marginal utility per Marginal utility per dollar dollar utility, utility, (MU/price) (MU/price) utils utils First Second Third Fourth Fifth Sixth Seventh 10 10 24 8 8 20 7 7 18 6 6 16 What 5 next? 5 12 4 4 6 3 3 4 12 10 9 8 6 3 2 $ 10 income Unit of product Product A: Price = $1 Product B: Price = $2 Marginal Marginal Marginal utility per Marginal utility per dollar dollar utility, utility, (MU/price) (MU/price) utils utils First 10 10 24 Second 8 8 20 Third 7 7 18 Fourth 6 6 16 What 5 next? Fifth 5 12 Buy one4of each Sixth 4 6 Seventh 3 3 4 12 10 9 8 6 3 2 $ 10 income Unit of product Product A: Price = $1 Product B: Price = $2 Marginal Marginal Marginal utility per Marginal utility per dollar dollar utility, utility, (MU/price) (MU/price) utils utils First Second Third Fourth Fifth Sixth Seventh 10 10 24 8 8 20 7 7 18 6 6 16 and then... 5 5 12 4 ($5 left) 6 4 3 3 4 12 10 9 8 6 3 2 $ 10 income Unit of product Product A: Price = $1 Product B: Price = $2 Marginal Marginal Marginal utility per Marginal utility per dollar dollar utility, utility, (MU/price) (MU/price) utils utils First Second Third Fourth Fifth Sixth Seventh 10 10 24 8 8 20 7 7 18 6 6 16 t5 hird 5 third unit of 12 product 4product B 6 4 3 3 4 12 10 9 8 6 3 2 $ 10 income Unit of product Product A: Price = $1 Product B: Price = $2 Marginal Marginal Marginal utility per Marginal utility per dollar dollar utility, utility, (MU/price) (MU/price) utils utils First Second Third Fourth Fifth Sixth Seventh 10 8 7 6 5 $3 4 3 10 8 7 6 5 left... 4 3 24 20 18 16 12 6 4 12 10 9 8 6 3 2 $ 10 income Unit of product Product A: Price = $1 Product B: Price = $2 Marginal Marginal Marginal utility per Marginal utility per dollar dollar utility, utility, (MU/price) (MU/price) utils utils First Second Third Fourth Fifth Sixth Seventh 10 10 8 8 7 7 6 6 5 left... 5 $3 4 4 Buy both! 3 3 24 20 18 16 12 6 4 12 10 9 8 6 3 2 $ 10 income Unit of product Product A: Price = $1 Product B: Price = $2 Marginal Marginal Marginal utility per Marginal utility per dollar dollar utility, utility, (MU/price) (MU/price) utils utils First 10 10 24 Second 8 8 20 Third 7 7 18 Fourth Income is gone... 6 6 16 dollar spent on 12 Fifth the last 5 5 Sixtheach good gave the same 6 4 4 utility per dollar Seventh 3 3 4 12 10 9 8 6 3 2 Algebraic Restatement of the Algebraic Utility Maximization Rule (Consumer Equilibrium) MU of product A Price of A = MU of product B Price of B Problem Problem Rating scale: 1 – 100 Product A : 45 Product B : 21 If the price of A is $15, If what would the price of B be in consumer equilibrium? in Answer: $7 ...
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This note was uploaded on 02/22/2011 for the course ECON 2023 taught by Professor Meier during the Spring '11 term at St. Petersburg College.

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