NOTE_Lecture_8_-_consumer_theory

NOTE_Lecture_8_-_consumer_theory - Theory of Consumer...

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1 Theory of Consumer Choice and Demand Objectives Utility: total utility vs. marginal utility Law of diminishing marginal utility The budget contraint and maximizing utility: the utility maximizing rule Consumer surplus What is utility? Utility refers to the satisfaction or “happiness” a person derives from consuming a good or service Utility of a good is measured by how much you are willing to pay for the good Utility is NOT usefulness!
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2 Hypothetical Demand Schedule for Hamburgers Price Qd $2.75 1 2.00 2 1.00 3 .25 4 Law of demand holds! Marginal utility (MU): the ADDITIONAL utility derived from consuming one more unit of a good or service Price Qd $2.75 1 2.00 2 1.00 3 .25 4 MU $2.75 2.00 1.00 .25 Price Qd MU $2.75 1 $2.75 2.00 2 2.00 1.00 3 1.00 .25 4 .25 Law of diminishing marginal utility . . . as we consume more and more of a good or service, we gain less and less additional (or marginal) utility
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3 Price Qd MU $2.75 1 $2.75 2.00 2 2.00 1.00 3 1.00 .25 4 .25 Total utility is the TOTAL satisfaction you derive from consuming a certain number of units of a good or service TU $2.75 4.75 5.75 6.00 To get total utility, just add up the marginal utilities of the units purchased Maximizing Utility How much we buy of any good or service depends on
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This note was uploaded on 05/22/2011 for the course ECON 1B taught by Professor Jamie during the Spring '06 term at West Valley.

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NOTE_Lecture_8_-_consumer_theory - Theory of Consumer...

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