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7/27/2019 Consumer Choice 4
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4
Consumer Choice:Individual and Market
DemandEverything is worth what its purchaser will pay for it.
PUBLILIUS SYRUS (1ST CENTURY B.C.)
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Copyright 2003 South-Western/Thomson Learning. All rights reserved.
Scarcity and Demand
Utility: A Tool to Analyze Purchase
Decisions
Consumer Choice as a Trade-off:
Opportunity Cost
From Individual Demand Curves to Market
Demand Curves
Contents
Copyright 2003 South-Western/Thomson Learning. All rights reserved.
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Copyright 2003 South-Western/Thomson Learning. All rights reserved.
Exceptions to the Law of Demand
Appendix: Analyzing Consumer Choice
Graphically: Indifference Curve Analysis
Contents (continued)
Copyright 2003 South-Western/Thomson Learning. All rights reserved.
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Copyright 2003 South-Western/Thomson Learning. All rights reserved.
Scarcity and Demand
Income is limited.
Consumer decisions to purchase different
commodities are interdependent.
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Copyright 2003 South-Western/Thomson Learning. All rights reserved.
Utility: A Tool to AnalyzePurchase Decisions
The Purpose of Utility Analysis
The purpose of utility analysis = analyzing how
people behave rather than how they think Theory of consumer choice = each consumer
spends his or her income in a way that yields
the greatest satisfaction Utility = amount of satisfaction
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Copyright 2003 South-Western/Thomson Learning. All rights reserved.
Total versus Marginal Utility
Total utility = benefit to a consumer from all
the units of a good purchased Marginal utility = benefit from the last unit of
a good purchased
number of goods purchased total utilitybut a marginal utility
Utility: A Tool to AnalyzePurchase Decisions
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The Law of Diminishing Marginal Utility
The law of diminishing marginal utility = the
more of a good a consumer has, the lessmarginal utility an additional unit contributes
to overall satisfaction
Additional units of a commodity are worth lessand less to a consumer in money terms.
Utility: A Tool to AnalyzePurchase Decisions
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TABLE4-1 Your Total andMarginal Utility for Pizza
Copyright 2003 South-Western/Thomson Learning. All rights reserved.
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FIGURE 4-1 A Marginal UtilityCurve: Your Demand for Pizza
Number of Pizzas per Month
8
Marg
ina
lUtility(Pr
ice
)per
Pizza
$1615
141312
1110
98765
4321
0 7
H
G
F
E
D
CB
A
P P
654321
Copyright 2003 South-Western/Thomson Learning. All rights reserved.
7/27/2019 Consumer Choice 4
10/41Copyright 2003 South-Western/Thomson Learning. All rights reserved.
Utility: A Tool to AnalyzePurchase Decisions
Using Marginal Utility: The Optimal
Purchase Rule
Buy the quantity of each good at which priceand marginal utility are exactly equal.
If marginal utility is greater (less) than price,
the consumer can improve well being bypurchasing more (less).
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FIGURE 4-2 Finding Your OptimalPizza Purchase Quantity
M Total netutility hill
To
talNe
tUtility
Number of Pizzas
$98
7
654321
012
654321
Copyright 2003 South-Western/Thomson Learning. All rights reserved.
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From Diminishing Marginal Utility to
Downward-Sloping Demand Curves
Law of diminishing marginal utility negative slope of demand curves
price quantity of demand
marginal utility Restores equality between price and marginal
utility
Utility: A Tool to AnalyzePurchase Decisions
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TABLE 4-2 List of OptimalQuantities of Pizza
Copyright 2003 South-Western/Thomson Learning. All rights reserved.
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Consumer Choice as aTrade-Off: Opportunity Cost
Decision to purchase something decision
to forgo something else
Opportunity cost of spending an extra dollaron good X = the utility from good Y the
purchaser could have gotten by spending
that dollar on good Y
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TABLE 4-3 Calculating MarginalNet Utility (Surplus)
Copyright 2003 South-Western/Thomson Learning. All rights reserved.
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Income and Quantity Demanded
Consumer Choice as aTrade-Off : Opportunity Cost
Income and Quantity Demanded
income purchases of normal goods
income purchases of inferior goods
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FIGURE 4-4 Total Market Demandvs. Individual Consumer Demand
Price
Price
9 6
(c)
Quantity Demanded
150
M
M
Market demand
(b)
Quantity Demanded
60
Z
Z Naomisdemand
(a)
Quantity Demanded
Price
$10
90
CCNNAA
K
D
D
Alexsdemand
Copyright 2003 South-Western/Thomson Learning. All rights reserved.
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From Individual to MarketDemand Curves
Exceptions to the Law of Demand
Some inferior goods
Goods whose quality is judged by price Goods with snob appeal
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Appendix:
Analyzing ConsumerChoice Graphically:
Indifference CurveAnalysis
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Copyright 2003 South-Western/Thomson Learning. All rights reserved.
Budget line
Graphical representation of all possible
combinations of a households purchases oftwo goods, given their prices and a fixed
amount of money to spend
Properties of the Budget Line Represents the maximum amounts of the goods
the consumer can afford
Geometry of AvailableChoices: The Budget Line
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TABLE 4-4 Alternative PurchaseCombinations
Copyright 2003 South-Western/Thomson Learning. All rights reserved.
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FIGURE 4-5 A Budget Line
K
E
A
B
C
G
7
6
5
4
3
2
765432
1
0
Poun
dso
fCh
eese
Boxes of Rubber Bands
1
D
Copyright 2003 South-Western/Thomson Learning. All rights reserved.
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Copyright 2003 South-Western/Thomson Learning. All rights reserved.
Changes in the Budget Line
income parallel shift in the budget line
relative prices of the goods slope of the budget line
Geometry of AvailableChoices: The Budget Line
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FIGURE 4-7 The Effect of PriceChanges on the Budget Line
Rubber bandprice = $3.00
Rubber bandprice = $1.50
87654320 1
E H
A
7
6
5
4
3
2
1
Poun
dso
fC
heese
Boxes of Rubber Bands
Copyright 2003 South-Western/Thomson Learning. All rights reserved.
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Copyright 2003 South-Western/Thomson Learning. All rights reserved.
Indifference curve = a line connecting all
combinations of the goods that are equally
desirable Properties of the indifference curve:
higher is better
never intersect
negative slope
bowed in (convex)
Properties of theIndifference Curve
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FIGURE 4-8 3 Indifference Curvesfor Cheese and Rubber Bands
IaIb
IC
R
T
U
S
8
7
6
5
4
3
2
765432
1
0
Poun
dso
fC
heese
Boxes of Rubber Bands
1
W
Copyright 2003 South-Western/Thomson Learning. All rights reserved.
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FIGURE 4-9 Slopes of a BudgetLine and an Indifference Curve
E
r
I
I
R
B
B
0
Poun
dso
fCheese
Boxes of Rubber Bands
F
D n
m
M
N
Copyright 2003 South-Western/Thomson Learning. All rights reserved.
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FIGURE 4-10 Optimal ConsumerChoice
1
2
3
4
5
6IaIb
Ic
U
K
7
7654320
Poun
dso
fC
heese
Boxes of Rubber Bands
1
T
W
Copyright 2003 South-Western/Thomson Learning. All rights reserved.
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Copyright 2003 South-Western/Thomson Learning. All rights reserved.
Tangency Conditions
Utility maximization point on the budget line
tangent to an indifference curve Marginal rate of substitution = price ratio at
that point
The Slopes of IndifferenceCurves and Budget Lines
S f ff
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Copyright 2003 South-Western/Thomson Learning. All rights reserved.
Consequences of Income Changes: Inferior
Goods
Inferior goods: indifference curves locatedsuch that income
purchases of one good
purchases of the other
The Slopes of IndifferenceCurves and Budget Lines
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4 12 Ri i I
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FIGURE 4-12 Rise in Income,Rubber Bands Are Inferior Good
C
C
Optimalconsumptioncurve
B
B
4320
Poun
dso
fC
heese
Boxes of Rubber Bands
1
H
G
Copyright 2003 South-Western/Thomson Learning. All rights reserved.
Th Sl f I diff
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Copyright 2003 South-Western/Thomson Learning. All rights reserved.
Consequences of Price Changes: Deriving
the Demand Curve
slope of the budget line quantity purchased of that good
quantity of the other good
The Slopes of IndifferenceCurves and Budget Lines
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4 14 D i i th
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FIGURE 4-14 Deriving theDemand Curve for Rubber Bands
D
DPric
eo
fRu
bber
Ban
dsper
Box
Quantity of Rubber BandsDemanded (boxes)
4321
1.50
3.00
$4.00
t
e