Microeconomics, Chapter 6 31 A Closer Look at The Law of Demand 2 Theory of Consumer Choice 3 Utility Maximization and the Demand... Microeconomics, Chapter 6 5Law of Diminishing Margina
Trang 1© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 1
The Theory of Consumer Behavior
SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE
Rinzie Luyao Stanley Saavedra
Trang 2In this Topic we will learn
curve is downward sloping
and the demand curve
situations
measure it
Trang 3© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 3
1 A Closer Look at The Law of Demand
2 Theory of Consumer Choice
3 Utility Maximization and the Demand
Trang 4Income & Substitution Effects
The Income Effect
purchases - and vice versa
The Substitution Effect
attracts new buyers - and vice versa
Trang 5© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 5
Law of Diminishing Marginal Utility
gains in satisfaction decline as additional units are consumed
Terminology
Total & Marginal Utility
consuming one more unit
graphically examined
Trang 6consumed
per meal
Total Utility
Marginal Utility
Total and Marginal Utility
Total Utility
0 10 20 30 40
Trang 7consumed
per meal
Total Utility
Marginal Utility
Total and Marginal Utility
Total Utility
0 10 20 30 40
Trang 8consumed
per meal
Total Utility
Marginal Utility
Total and Marginal Utility
Total Utility
0 10 20 30 40
Trang 9© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 9
Tacos
consumed
per meal
Total Utility
Marginal Utility
Total and Marginal Utility
Total Utility
0 10 20 30 40
Figure 1
© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 9
Trang 10consumed
per meal
Total Utility
Marginal Utility
Total and Marginal Utility
Total Utility
0 10 20 30 40
Figure 1
Trang 11© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 11
Tacos
consumed
per meal
Total Utility
Marginal Utility
Total and Marginal Utility
10 8 6 4 2 0 -2
Total Utility
0 10 20 30 40
Trang 12consumed
per meal
Total Utility
Marginal Utility
Total and Marginal Utility
10 8 6 4 2 0 -2
Total Utility
0 10 20 30 40
Figure 1
Trang 13© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 13
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
Trang 141 A Closer Look at The Law of Demand
2 Theory of Consumer Choice
3 Utility Maximization and the Demand
Trang 15© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 15
Theory of Consumer Choice
A Typical Consumer.…
Exhibits rational behavior
Knows clear-cut preferences
Is subject to a budget constraint
Responds to price changes
Trang 16Utility Maximizing Rule
The consumer’s money income should
be allocated so that the last dollar spent
on each product purchased yields the same amount of extra (marginal) utility
Trang 17© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 17
Trang 18Product A p=$1 Product B p=$2 unit of
12 10 9 8 6 3 2
Table 1
Trang 19© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 19
What will the consumer buy first?
What will the consumer buy first? And next?
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Algebraic Restatement of the
Utility Maximization Rule
Trang 22Theory of Consumer Behavior Topics
1 A Closer Look at The Law of Demand
2 Theory of Consumer Choice
3 Utility Maximization and the Demand
Trang 23© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 23
Utility Maximization & the Demand Curve
Deriving the Demand Curve
what if the price of Product B falls to
$1?
Trang 24Product A p=$1 Product B p=$1 Product B p= $1
24 20 18 16 12 6 4
Table 1
Trang 26 when p Product B =$2
when p Product B =$1
Utility Maximization & the Demand Curve
Trang 27Product B price quantity demanded
$1
$2
6 4
Trang 28 Substitution Effect
substitution of now cheaper B
Income Effect
consumption of both A & B
Utility Maximization & the Demand Curve
Trang 29© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 29
1 A Closer Look at The Law of Demand
2 Theory of Consumer Choice
3 Utility Maximization and the Demand
Trang 30Applications & Extensions
DVDs & DVD Players
Trang 31© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 31
Applications & Extensions
DVDs & DVD Players
The Diamond-Water Paradox
Trang 32Applications & Extensions
DVDs & DVD Players
The Diamond-Water Paradox
The Value of Time
Trang 33© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 33
Applications & Extensions
DVDs & DVD Players
The Diamond-Water Paradox
The Value of Time
Cash & Non-cash Gifts
Trang 341 A Closer Look at The Law of Demand
2 Theory of Consumer Choice
3 Utility Maximization and the Demand
Trang 35© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 35
Trang 37© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 37
D=MB
Q
market price
amount paid
Q*
total consumer surplus
Consumer Surplus
Figure 3
Trang 381 A Closer Look at The Law of Demand
2 Theory of Consumer Choice
3 Utility Maximization and the Demand
Trang 39© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 39
Indifference Curve Analysis
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The Budget Line
Units of A(p=$1.50)
Units of B(p=$1.00)
Total expenditure
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2 4 6 8 10 12
The Budget Line
Units of A(p=$1.50)
Units of B(p=$1.00)
Total expenditure
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The Budget Line
Units of A(p=$1.50)
Units of B(p=$1.00)
Total expenditure
Trang 43© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 43
2 4 6 8 10 12
The Budget Line
Units of A(p=$1.50)
Units of B(p=$1.00)
Total expenditure
Trang 442 4 6 8 10 12
The Budget Line
Units of A(p=$1.50)
Units of B(p=$1.00)
Total expenditure
Trang 45© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 45
2 4 6 8 10 12
Unattainable
The Budget Line
Units of A(p=$1.50)
Units of B(p=$1.00)
Total expenditure
Trang 462 4 6 8 10 12
The Budget Line
An increase in
income makes the purchase of more of either or
both items possible
An increase in
income makes the purchase of more of either or
both items possible
Income increases
Income increases
Trang 47© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 47
items
Price of A rises
Price of A rises
Trang 49© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 49
Trang 51© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 51
Trang 53© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 53
Trang 54Indifference curves are convex to the
origin
Trang 55© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 55
is the slope of the indifference curve
at any point
Marginal rate of substitution (MRS)
is the slope of the indifference curve
at any point
MRS diminishes, so curve is convex
MRS diminishes, so curve is convex
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Indifference Curves
Indifference map shows a series of indifference curves, for different levels
of utility
Indifference map shows a series of indifference curves, for different levels
I I1 2
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Equilibrium at Tangency
Point X represents
the optimal attainable combination of products A & B
Point X represents
the optimal attainable combination of
4
I I1 2
Trang 58The Measurement of Utility
numerically measurable
a consumer specify if a particular combination
of products yields more or less utility than another
B B
B B
A
MU
MU MRS
MU
MU P
P P
MU P
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2 4 6 8 10 12
Derivation of the Demand Curve
What happens if the price of B increases to $1.50?
What happens if the price of B increases to $1.50?
4
I I1 2
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Derivation of the Demand Curve
New budget line reflects the price
Trang 61© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 61
Trang 622 4 6 8 10 12
Derivation of the Demand Curve
Recording quantities demanded of B at various prices of B yields the demand
curve for B
Recording quantities demanded of B at various prices of B yields the demand
Trang 63© 2005 McGraw-Hill Ryerson Ltd Microeconomics, Chapter 6 63
10 12 8
utility in utils
We can derive the demand curve without measuring
utility in utils