CONSUMER BEHAVIOR

UTILITY

• The satisfaction that consumption of a good or service provides

DIMINISHING MARGINAL UTILITY

As you consume additional units of a good, at some point each additional unit will begin providing less utility than the one before it.

UTILITY

• Total utility• Total satisfaction from a specific quantity

• Marginal utility• Extra satisfaction from an additional unit

• Law of diminishing marginal utility• Explains downward sloping demand

• Why are newspaper vending machines different than pop machines?

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GRAPHING UTILITY

0

10

20

30

1086420

-2

1 2 3 4 5 6 7

1 2 3 4 5 6 7

Tota

l Uti

lity

(Uti

ls)

Mar

gin

al U

tilit

y (U

tils

)

(1)Tacos

ConsumedPer Meal

(2)Total

Utility,Utils

(3)Marginal

Utility,Utils

0

1

2

3

4

5

6

7

0

10

18

24

28

30

30

28

]]]]]]]

10

8

6

4

2

0

-2

TU

MU

Total Utility

Marginal Utility

Units Consumed Per Meal

Units Consumed Per Meal

7-5

Let’s go to…

How many tacos will you eat?What KEY piece of information are we missing?

THEORY OF CONSUMER BEHAVIOR

•Key dimensions of the consumer problem• Rational behavior• Preferences • Budget constraint• Prices

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THEORY OF CONSUMER BEHAVIOR

•Find utility maximizing combination of goods

•Utility maximizing rule• Allocate income• Last dollar spent on each good yields same marginal utility

• Marginal utility per dollar• What provides more utility to you, a Baconator or a JBC?

• Why might you still buy the JBC over the Baconator? 7-7

Numerical ExampleCombinations of apples and oranges obtainable with an income of $10

1. Compare marginal utilities2. Then compare

per dollar - MU/Price3. Choose the highest4. Check budget -

proceed to next item

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LET’S SPEND THE $10!

WHAT ABOUT AN $8 BUDGET??

$9???

ALGEBRAIC GENERALIZATION

MU of product A

price of A

MU of product B

price of B=

8 Utils

$1

16 Utils

$2=

Optimum Achieved – Money income is allocated so that the last dollar spent on

each product yields the same extra or marginal utility

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PRACTICE