Utility: A Measure of the Amount of SATISFACTION A Consumer Derives from Units of a Good Chapter 5:...

Utility:

A Measure of the Amount of

SATISFACTIONA Consumer Derives fromUnits of a Good

Chapter 5: Utility Analysis

Utility as a basisfor Demand

David's Utility Schedule for Hamburgers

0 01 62 113 154 185 206 217 21.1

Number Total Utility

Diminishing Marginal Utility:

Each ADDITIONAL hamburgerProduces Less and Less

ADDITIONAL SATISFACTION

David's Utility Schedule for Hamburgers

0 01 62 113 154 185 206 217 21.1

Total Utility Marginal Utility

(6-0)/1 = 6

(11-6)/1 = 5(15-11)/1 = 4(18-15)/1 = 3(20-18)/1 = 2(21-20)/1 = 1(21.1-21)/1 = 0.1

Each additional hamburgerproduces less and less additional utility

Number

Indifference Curve:All Possible Combinationsof Two Goods that Producethe Same Amount of Total Utility

An Indifference Curve: The consumer isequally happy (satisfied) at any of the points along a single curve

An Indifference Curve represents the same amount of utility everywhere

Indifference Curvefor OneUtility Level

"Convex to the Origin"Preference For some of bothHamburgers and French Fries

Indifference Curvesfor each Utility Level

Indifference curves never touch or intersect each other

Indifference Map

utility level 1

utility level 2

utility level 3

utility level 4

More Utilit

y

Budget LineAssume:

Price of Hamburger is $1.00Price of French Fries is $.50Income is 7.50

Could Purchase 7.5 Hamburgers0 French Fries

or 15 French Fries, 0 Hamburgers9 French Fries, 3 Hamburgersor

Many other feasible combinationswith the $7.50 of income

Budget Line for $7.50 Income

Combinations of Hamburgers & French Fries

that can be Purchased for $7.50

An Indifference Curve and Budget Line

Specific utility level

3

Point of Tangency between Budget Line and Indifference Curve Determines Optimum Quantities ofHamburgers and French Fries

utility level 2

utility level 3

utility level 4

utility level 5

Indifference Curve Map

utility level 1

9

Price of Hamburgers /Price of French Fries= Slope of Budget Line

Marginal Rate of Substitutionof Hamburgers for French Fries= Slope of Indifference Curve

Optimum Combination: 3 Hamburgers, 9 French Frieswhere

Price of Hamburgers/Price of French Fries =Marginal Rate of Substitutionof Hamburgers for French Fries

Impact of More Income

A new, higher budget line

with the same slope

but reaches a higher indifference curve

Budget Line for $7.50 and $12.50 Income

$12.50

$7.50

Impact of Price Changefor Hamburgers

Hamburgers

Special Today

All you can eat

50 cents each

Hamburgers

$3.75 each

Price of Hamburgers decreases to $.50

9 Hamburgers x $.50 = 4.50

6 French Fries x $.50 = $3.00

still spent $7.50 total

9

6

Price of Hamburgers now $3.75

How many French Fries ??

Quantity of Hamburgers now taken: 1

Tracing the Demand Curve for Hamburgers

Price Quantity Demanded

3.75 11.00 30.50 9

.5

1.00

3.75

1 3 9

Price of

Quantity Demanded per unit of time

Demand

A Demand Schedule for Hamburgers

Hamburgers

Consumer demand has its roots

in consumer utility theory

Price

Quantity/ unit of time

D