Textbook Notes (368,440)
Canada (161,878)
Economics (326)
ECON 110 (199)
Chapter 6

Chapter 6 notes.docx

4 Pages
Unlock Document

ECON 110
Ian James Cromb

Chapter Six: Consumer Behaviour Marginal Utility and Consumer Choice  Economist assume that in making their choices, consumers are motivated to maximize their utility  The satisfaction/well-being that a consumer receives from a good/service  Possible to construct a theory in consumer behaviour based on utility maximization  Must be able to distinguish between o Total Utility: The total satisfaction resulting from the consumption of a given commodity by a consumer, and o Marginal Utility: The additional satisfaction obtained from consuming one additional unit of a commodity Diminishing Marginal Utility  A central hypothesis of utility theory (law of diminishing marginal utility) is; o The utility that any consumer derives from successive units of a particular product consumed over some period of time diminishes as the total consumption of the product increases (if consumption of other products is unchanged) Utility Schedules and Graphs  We make the assumption that utility can be measured, and thus can be compared o This allows us to see the difference between total and marginal utility o As we consume more of a product, total utility rises however the utility that you get from each additional product (marginal utility) is less than the previous one Maximizing Utility  This is the assumption that consumers try to make themselves as well off as they can in the circumstances in which they find themselves – income and market prices The Consumer Decision – ex. on page 123 & 124  To maximize utility, the consumer should consume products until the marginal utility per dollar of one good is equal to the marginal utility per dollar of another good o A utility-maximizing consumer allocates expenditures so that the utility obtained from the last dollar spent on each product is equal o Keep “switching” expenditure from one product to another until the marginal utilities per dollar on each good is the same (get less of one & more of the other) Is this Realistic?  Not many people are willing to stand in the store and compute these ratios to max utility  However, this theory is used by economists to predict how consumers will bejave when faced with such events as changing prices and incomes o If consumers continue to try their best with their resources, the actual thought process not important - try to discover implications of their maximizing behaviour The Consumer’s Demand Curve  Must as what happens when there is change in price in order to derive this demand curve  As a rise in the price of a product (everything else constant) leads each consumer to reduce the quantity demanded of the product o Numerator on left side is bigger – because of diminishing M.U. we need to reduce the quantity consumed so that the M.U. for each unit of good increases Income and Substitution Effects on Price Changes  Can be used to think about the slope of a market demand curve o The fall of one good’s price (everything being equal) affects the curve in two ways  First, incentive to buy more (more demand) creates substitute. Second, the price has fallen which gives consumers more real income to spend o 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  This effect increases the quantity demanded of a good whose price has fallen and reduces the quantity demanded of a good whose price has risen  To maximize utility after a price drop, you must increase your consumption of that good o In other words, you must substitute away from other goods and toward that one  Substitution Effect: The change in quantity of a good demanded resulting from a change in its relative price (holding real income constant)  See the effect of relative price change by holding purchasing power constant The Income Effect  Income Effect: The change in the quantity of a good resulting from a change in real income (holding relative prices constant)  The income effect leads consumers to buy more of a product whose price has fallen, provided that the product is a normal good  See the effect of the change of purchasing
More Less

Related notes for ECON 110

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.