Ch07-7e[1] - UTILITY AND DEMAND 7 CHAPTER Objectives After studying this chapter you will able to Describe preferences using the concept of utility

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UTILITY AND DEMAND 7 CHAPTER
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Objectives After studying this chapter, you will able to Describe preferences using the concept of utility and distinguish between total utility and marginal utility Explain the marginal utility theory of consumer choice Use marginal utility theory to predict the effects of changing prices and incomes Explain the paradox of value
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Water, Water, Everywhere Why is water, which is so vital to life, far cheaper than diamonds, which are not essential? Why is the demand for heat and light inelastic while the demand for PCs is elastic? This chapter helps you to answer questions such as these.
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Household Consumption Choices A household’s consumption choices are determined by: Consumption possibilities Preferences Consumption Possibilities A household’s consumption possibilities are constrained by its budget and the prices of the goods and services it buys. A budget line describes the limits to a household’s consumption choices.
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Household Consumption Choices Figure 7.1 shows a budget line. The household can afford all the points on or below the budget line. The household cannot afford the points beyond the budget line.
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Household Consumption Choices Preferences A household’s preferences determine the benefits or satisfaction a person receives consuming a good or service. The benefit or satisfaction from consuming a good or service is called utility . Total Utility Total utility is the total benefit a person gets from the consumption of goods. Generally, more consumption gives more utility.
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Household Consumption Choices Table 7.1 on page 151 provides an example of total utility schedule. Figure 7.2(a) shows a total utility curve. Total utility increases with the consumption of a good.
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Marginal Utility Marginal utility is the change in total utility that results from a one-unit increase in the quantity of a good consumed.
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This note was uploaded on 02/24/2012 for the course ACCOUNTING 504 taught by Professor Abeer during the Spring '09 term at Yarmouk University.

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Ch07-7e[1] - UTILITY AND DEMAND 7 CHAPTER Objectives After studying this chapter you will able to Describe preferences using the concept of utility

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