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Chapter 5

chapter 5 consumer theory overheads.ppt

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Department
Economics
Course
ECON 1900
Professor
Nancy Carson
Semester
Winter

Description
Chapter 5 Topics 5.1 A Closer Look at The Law of Demand 5.2 Theory of Consumer Choice 5.3 Utility Maximization and the Demand Curve 5.4 Applications & Extensions • Total vs Marginal Utility total utility: total amount of satisfaction marginal utility: extra satisfaction from consuming one more unit • Law of Diminishing Marginal Utility – gains in satisfaction decline as additional units are consumed – Marginal utility is decreasing graphically examined.... Total and Marginal Utility Tacos Total Marginal consumed Utility Utility Total Utility per meal = DTU/DQ 40 30 0 0 20 total utility 1 10 0 0 1 2 3 4 5 6 7 8 2 18 quantity 3 24 Marginal Utility 15 4 28 10 5 5 30 ut0litiy mar-5nal 6 30 0 1 2 3 4 5 6 7 8 quantity 7 28 Total and Marginal Utility Tacos Total Marginal Total Utility consumed Utility Utility per meal = DTU/DQ 40 30 0 0 20 10 total utility 1 10 0 8 0 1 2 3 4 5 6 7 8 2 18 quantity 3 24 6 Marginal Utility 4 28 4 15 2 10 5 30 5 0 0 6 30 marginal utilitiy -2 0 1 2 3 4 5 6 7 8 7 28 quantity Marginal Utility, Demand & Elasticity • if marginal utility falls rapidly for each successive unit… • it will take a considerable drop in price to cause an increase in quantity demanded… • so demand is fairly INELASTIC 5.2 Theory of Consumer Choice Assumptions for a Typical Consumer.… • Exhibits rational behavior • Knows clear-cut preferences • Is subject to a budget constraint • Responds to price changes Utility Maximizing Steps First, put the marginal utilities into a per- dollar-spent basis • Decision-making process: at each step, spend where the marginal utility per dollar is highest until income is exhausted. Income $10 Product A p=$1 Product B p=$2 unit of marginal MU product utility st 1 10 24 2nd 8 20 3rd 7 18 4th 6 16 5th 5 12 th 6 4 6 7th 3 4 Income = $10 Product A p=$1 Product B p=$2 unit of marginal MU/p MU MU/p product utility st 1 10 10 24 12 2nd 8 8 20 10 3rd 7 7 18 9 4th 6 16 6 8 5th 5 5 12 6 th 6 4 4 6 3 7th 3 3 4 2 Decision-Making Process Income =$10, P =A1, P =B2 MU/p, MU/p, Product Product Product A Product B Spending A B 1st 10 1st 12 2nd 8 2nd 10 rd rd 3 7 3 9 4th 6 4th 8 5th 5 5th 6 th th 6 4 6 3 7th 3 7th 2 Utility Maximizing Rule • The marginal utility per dollar spent
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