Week 3 study guide

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Department
Economics for Management Studies
Course
MGEA02H3
Professor
Gordon Cleveland
Semester
Fall

Description
Chapter 6 Consumer Behaviour Notes 6.1 Marginal Utility and Consumer Choice N utility : the satisfaction or well-being that a consumer receives from consuming some good or service N total utility : the total satisfaction resulting from the consumption of a given commodity by a consumer N marginal utility : the additional satisfaction obtained by a consumer from consuming one additional unit of a commodity Diminishing Marginal Utility N the law of diminishing marginal utility, is as follows: the utility that any consumer derives from successive units of a particular product consumed over some period of time diminishes as total consumption of the product increases (if the consumption of all other products is unchanged) Maximizing Utility N utility-maximizing consumer allocates expenditures so that the utility obtained from the last dollar spent on each product is equal N the condition required for a consumer to be maximizing utility, for any pair of products, is MUx Px = MUy Py N this equation says that a utility-maximizing consumer will allocate expenditure so that the utility gained from the last dollar spent on one product is equal to the utility gained from the last dollar spent on any other product N when expenditure is adjusted to maximize utility, the value to the consumer of consuming the marginal unit of some good is just equal to the opportunity costthe value to the consumer of the money used to make the purchase N another equation is MUx MUy = Px Py N the right side of this equation is the relative price of the two goods and is determined by the market N the left side is the relative ability of the two goods to add to utility, which is within a persons control because in determining the quantities of different goods to buy, a person also determines their marginal utilities The Consumers Demand Curve N a rise in the price of a product (with all other determinants of demand held constant) leads each consumer to reduce the quantity demanded of the product 6.2 Income and Substitution Effects of Price Changes N real income : income expressed in terms of the purchasing power of money income, that is, the quantity of goods and services that can be purchased with the money income The Substitution Effect N substitution effect : change in quantity of good demanded resulting from in its relative price (holding real income constant) N the substitution effect increases the quantity demanded of a good whose price
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