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Chapter 6 Comprehensive Notes

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University of Texas at Austin
ECO 304K

Econ Chapter 6 Notes: Consumer Choice and Demand 1. Demand analysis rests on the assumption that people are rational decision makers 2. Two majors ways to to approach consumer choice a. Utility Theory/Utilitarianism- rational consumers will allocate their limited incomes so as o maximize their happiness or satisfaction b. Indifference curve analysis- portray combinations of two goods of equal total utility 3. Marginal Utility Analysis- Satisfaction can be measured and that consumers maxaimize satisfaction when the marginal utilities per dollar are equal for all products and services a. The Budget Line i. A lot like a production possibilities frontier (PPF) except its what is attainable and unattainable for you on your budget b. Preferences and Utility i. Utility- Hypothetical measure of consumer satisfaction 1. With pizza and rock climbing a. 50 dollars to spend, 20 dollars an hour rock climbing, 10 dollars an hour. Make a graph of utility vs. 1 more pizza or 30 more minutes of rock climbing. Each extra unit gives an added utility or happiness, but the happiness for the first pizza is greater than the fifth i. You have to come up it a way to maximize utility c. Marginal and Total utility i. Totally Utility- Total satisfaction that a person receives from consuming a certain quantity of goods and services ii. Marginal Utility- Satasfication derived from consuming an addional unit a given product or service d. Law of diminishing marginal utility- we eventually will grow sick of the same thing, we are only happy with a certain amount of a given product, you cant have icecream all the time you won’t be happy e. Maximizing Utility i. Utility maximizing rule – equation that tells you what combination of goods and services will return the greatest amount of utils or happiness 1. Mu=marginal utility, P=price 2. Mu pizzaPizzaMu wallclimbiwallcl
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