06_Consumers_

# 06_Consumers_ - Consumers[Consumer Choice...

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1 Consumers [Consumer Choice & Elasticities] (Section 6) I. Definitions Utility [Felicity] (Satisfaction) - The benefit or satisfaction a person gets from a choice or action Marginal Utility (MU)- The additional utility someone gets from consuming an additional unit of a good. Marginal Utility Formula = Quantity Utility Total Δ Δ Law of Diminishing Marginal Utility - As someone consumes more of a good marginal utility will eventually decline (as consume more the increase in utility will be smaller each time) Exs- Marginal Benefit (MB)- Maximum price a consumer is willing to pay for an additional unit of a product. The dollar value of a consumer’s utility of consuming an additional unit: So it f______ as consumption increases

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2 II. The individual: Demand curve & consumer choice Marginal Benefit reexamined What does it really mean if a consumer is willing to pay up to (at most) \$10 for an additional unit of the product. Marginal Utility per \$ spent : A A P MU MU A good of Price A Good Interpret : Ex : Buying one more burrito (from 1 to 2) gives you an in utility of 10 & costs \$5
3 A. Deriving a demand curve for slices of pizza for Carlos Slices Total Utility MU P MU if P=\$2 P MU if P=\$1 P MU if P=\$0.50 0 0 X 1 200 200 2 390 3 570 4 740 5 900 6 1030 7 1130 8 1200 9 1240 10 10 Cheeseburgers That cost \$0.50 Slices Total Utility MU P MU 1 130 130 2 240 3 340 4 430 5 505 6 555 7 580 8 595 9 605 10 610 Carlos’ wife gives him \$5 every day for lunch and any money he does not spend on lunch is stolen by his coworker Grat.

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4 If Carlos is a utility maximizer & pizza costs \$2 how much does he buy? Pizza bought CheeseB. he can afford Total Utility How about if pizza costs a \$1? Pizza bought CheeseB. he can afford Total Utility How about if pizza costs \$0.50? Pizza bought CheeseB. he can afford Total Utility Graph a demand curve for pizza for Carlos:
5 B. Consumer equilibrium What do you notice at all of Carlos’ optimal choices? Hint: It has to do with the x x P MU relation. Why must this be true? Ex : Price of Pizza = \$0.50

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6 C. Substitution & Income Effects Substitution Effect- The part of a change in the amount of goods purchased because the good is cheaper or more expensive than other goods Income Effect - The part of a change in the amount of goods purchased because the consumer’s income is higher or lower Exs -
7 III. The market demand Horizontally add up all the individual’s demand curves. Bogut’s Demand William’s Demand Paul’s Demand Price Quantity Price Quantity Price Quantity \$1 4 \$1 3 \$1 8 \$2 3 \$2 2 \$2 6 \$3 2 \$3 1 \$3 4 \$4 1 \$4 0 \$4 2 Graphs:

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8 IV. Elasticity of Demand We now have shown (in several ways) that an increase in price will decrease quantity demand but we have not examined how big the effect is. A. Definitions & calculations
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## This note was uploaded on 12/27/2011 for the course ECON 201 taught by Professor Staff during the Fall '08 term at Wisc Whitewater.

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06_Consumers_ - Consumers[Consumer Choice...

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