Econ Notes set 9 - ECONOMICS 2001 PRINCIPLES OF MICROECONOMICS Slide Set 9 Utility Budget Lines and Household Consumption Professor Lucia F Dunn

# Econ Notes set 9 - ECONOMICS 2001 PRINCIPLES OF...

• Notes
• 29

This preview shows page 1 - 7 out of 29 pages.

© 2012 Lucia F. Dunn 1 ECONOMICS 2001 PRINCIPLES OF MICROECONOMICS Professor Lucia F. Dunn Department of Economics Slide Set 9: Utility, Budget Lines, and Household Consumption
2 Household Consumption BehaviorUtilityUtility: Satisfaction or Pleasure; Want-Satisfying PowerMarginal Utility (MU)Marginal Utility (MU): The last extra bit of utility a consumer gets from consuming the last extra unit of the item.QUESTION: What determines value (i.e., price)?Paradox:Paradox:Water CheapDiamondsExpensiveUtility and Marginal Utility
3 Household Consumption Behavior * Value is determined by marginal utility from last unit consumed Law of Diminishing Marginal Utility Law of Diminishing Marginal Utility : The more you consume of a certain good, the less you value additional units of it. Utility and Marginal Utility
4
5 Remember that it is Marginal Utility , not Total Utility, that determines the value or price of an item.
6 Household Consumption Behavior (Continued) Cardinal Approach – Exact Numbers - can’t use this with utility Ordinal Approach – Rank Order - this is used with utility