ECON 208 Lecture Notes - Ceteris Paribus, Consumer Behaviour, Complementary Good

19 views3 pages
Published on 13 Jul 2012
School
McGill University
Department
Economics (Arts)
Course
ECON 208
Chapter 6: Consumer Behaviour
Utility: the value that you get (it is not an absolute measure)
Utility maximizing consumers adjust their expenditure until the marginal
utility per dollar spend is equalized across products
Any change in price generates both an income and a substitution effect
Consumer surplus is the “Bargain” the consumers gets by paying less for the
product than the maximum price he or she is willing to pay
Diminishing marginal utility- marginal utility is about that last unit you are
consuming
Ceteris paribus, the utility that any consumer derives from successive units of
a particular product is assumed to diminish as total consumption of the
product increases (we assume your appreciation for it decreases as you have
more and more)
Marginal utility (difference) falls as consumption rises
You’re still better off which each successive thing (if it wasn’t getting better
you wouldn’t consume it) but the utility decreases with each one
Consumers must decide how to adjust their expenditure to maximize total
utility
A utility-maximizing consumer allocates expenditures so that the utility
obtained from the last dollar spent on each product is equal
Consider a consumer whose utility from the last dollar spent on Coke is more
than from the last dollar spent on burritos. She could increase her total
utility by switching a dollar of expenditure from burritos to Coke, and
continuing until the marginal utility per dollar spent on Coke equals the
marginal utility per dollar spent on burritos.
For 2 products, X and Y, the utility-maximizing condition is:
MUX = MUY or MUx = px
px pY MUy = pY
Consumer behaviour should satisfy this if people are behaving rationally
In the second equation (above) the consumer is adjusting her consumption (and
thus the ratios of MUs in response to changes in relative prices
What happens when there is a change in the product’s pice?
If the price of Coke (X) rises, then at the previous utility-maximizing consumption
bundle, we have:
MUx < pX
MUY pY
Unlock document

This preview shows page 1 of the document.
Unlock all 3 pages and 3 million more documents.

Already have an account? Log in

Document Summary

Utility: the value that you get (it is not an absolute measure) Utility maximizing consumers adjust their expenditure until the marginal utility per dollar spend is equalized across products. Any change in price generates both an income and a substitution effect. Consumer surplus is the bargain the consumers gets by paying less for the product than the maximum price he or she is willing to pay. Diminishing marginal utility- marginal utility is about that last unit you are consuming. Marginal utility (difference) falls as consumption rises. You"re still better off which each successive thing (if it wasn"t getting better you wouldn"t consume it) but the utility decreases with each one. Consumers must decide how to adjust their expenditure to maximize total utility. A utility-maximizing consumer allocates expenditures so that the utility obtained from the last dollar spent on each product is equal.

Get OneClass Grade+

Unlimited access to all notes and study guides.

YearlyMost Popular
75% OFF
$9.98/m
Monthly
$39.98/m
Single doc
$39.98

or

You will be charged $119.76 upfront and auto renewed at the end of each cycle. You may cancel anytime under Payment Settings. For more information, see our Terms and Privacy.
Payments are encrypted using 256-bit SSL. Powered by Stripe.