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Chapter 6.docx

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Department
Economics (Arts)
Course
ECON 208
Professor
Mayssun El- Attar Vilalta
Semester
Fall

Description
Chapter 6 Oct.25.12 Marginal utility and consumer choice - Consumers are motivated to maximize their utility - Utility: satisfaction derived from goods/services consumed - Total utility: full satisfaction resulting from consumption of some product by a consumer - Marginal utility: additional satisfaction from consuming one more unit of some product - Utility can be compared: assumptions to compare total and marginal - individuals know the utility from different actions - individuals can compare the utility from different actions Diminishing marginal utility - ceteris paribus: utility that any consumer derives from successive units of a product is assumed to diminish as total consumption of the product increases (marginal utility falls as consumption rises) Utility schedules and graphs When product consumption increases: - total utility increases - marginal utility decreases Total utility, marginal utility, & demand curve - shape of the marginal utility = shape of the demand curve Maximizing utility 1. Consumer’s decision - consumers seek to maximize total utility subject to the constraints they face (income and market prices) - utility-maximizing consumer allocates expenditures so that utility obtained from the last dollar spent on each product is equal - consumer adjusts consumption in response to changes in relative prices 2. Alternative interpretation 3. Realistic? Consumer’s demand curve - when there is a change in the product’s price: o if the price of X rises, then o when the consumer reduces consumption of X the marginal utility rises Income and substitution effect of price changes - change in price has two effects: changes relative price and consumers’ real income Income effect - if the price of the good is lowered then the consumer becomes richer (keeps more income) - normal good: consumers buy more of a product that has a price decrease - inferior good: consumers buy less of a product that has a price decrease Substitution effect - the good that now has a lower price becomes more attractive - increases quantity demanded of a good whose relative price has fallen - reduces the quantity demanded of a good whose relative price has increas
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