Microeconomics – Chapter 8
Consumption Choices are influenced by two main factors:
1. Consumption Possibilities
Consumption Possibilities - All the things that you can afford to buy
Budget Line – marks boundary between those combinations of G&S that a household
can afford to buy and those that is cannot afford
CP changes when income or prices change.
-Rise in income shifts budget line outward.
-Change in price changes slope of line.
Preferences – a description of the consumer’s likes and dislikes
Want to explain what determines demand and marginal benefit.
Utility – benefit or satisfaction a person gets from consumption of G&S
Two utility concepts:
1. Total Utility
2. Marginal Utility
Total Utility – total benefit that a person gets from consumption of all the different
-depends on level of consumption (more consumption generally gives more
TU increases and quantity consumed increases.
Marginal Utility – change in total utility that results from a one-unit increase in the
quantity of a good consumed
MU is Positive, but Diminishes as the quantity of a good consumed increases.
Ex. Of Negative MU – hard labour and polluted air.
Principle of Diminishing Marginal Utility – tendency for marginal utility to decrease
as consumption of a good increases
Consumer Equilibrium – situation in which a consumer has allocated all of his or her
available income in the way that maximizes his or her
total utility, given the prices of G&S
Marginal Utility per Dollar – marginal utility from a good that results from spending
one more dollar on it To find the marginal utility per dollar of something: MU_/P_
Utility Maximizing Rule
Consumer’s total utility is maximized by following the rule:
-Spend all the available income
-Equalize the marginal utility per dollar for all goods
MUx = MUy*(Px/Py)
As long as marginal utility per dollar from Good A exceeds that from Good B, total
utility can be increased by spending more on A and less on B.
Marginal Utility Theory predicts the law of demand.
Fall in substitute of good decreases the demand for the good.
Normal good, rise in income increases demand.
Find the effect o