Chapter 19 - Theory of consumer behavior. The main contents of this chapter include all of the following: Marginal utility, the law of diminishing returns, total utility, maximizing utility, the water-diamond paradox, consumer surplus.
Trang 1Theory of Consumer Behavior
Trang 3• What is utility?
– Utility is NOT usefulness!
– Utility means only that you think enough of something to buy it
– Utility is measured by how much you are willing to pay for something
Trang 8Units
Trang 9Note: Marginal Utility is the same as the price.
Trang 10Units
Trang 11Price Purchased MU TU
Trang 13Price Purchased MU TU
$2.75 1 $2.75 $2.75 2.00 2 2.00 4.75 1.00 3 1.00 5.75 .25 4 .25
Total Utility is the utility derived from consuming
a certain number of units of a good or service
Units
Trang 14Price Purchased MU TU
$2.75 1 $2.75 $2.75 2.00 2 2.00 4.75 1.00 3 1.00 5.75 .25 4 .25 6.00
Total Utility is the utility derived from consuming
a certain number of units of a good or service
Units
Trang 15Price Purchased MU TU
Units
Trang 16• How much we buy of any good or service
depends on
– Its price – Our marginal utility schedule
Price Purchased MU TU
Trang 17• We try to spend our money on what will give us
the most utility!
– As we consume more of a good or service, its utility declines!
– This means that we will keep buying more of a good
or service until our marginal utility falls to the level of the price. At this point marginal
utility is the same as the price.
Trang 18• We try to spend our money on what will give us
the most utility!
– As we consume more of a good or service, its utility declines!
– This means that we will keep buying more of a good
or service until our marginal utility falls to the level of the price. At this point marginal
utility is the same as the price.
Marginal Utility
Trang 19• We try to spend our money on what will give us
the most utility!
– Remember, as we consume more of a good or service, its utility declines!
– This means that we will keep buying more of a good
or service until our MU falls to the level of the price
Price Purchased MU TU
$2.75 1 $2.75 $2.75 2.00 2 2.00 4.75 1.00 3 1.00 5.75 .25 4 .25 6.00
Units
The price is $1.00. How many units would you buy?
The answer is 3
Trang 20Maximizing Utility
• We try to spend our money on what will give us
the most utility!
– Remember, as we consume more of a good or service, its utility declines!
– This means that we will keep buying more of a good
or service until our MU falls to the level of the price
Price Purchased MU TU
$2.75 1 $2.75 $2.75 2.00 2 2.00 4.75 1.00 3 1.00 5.75
Units
The MU of the last unit purchased will always equal its price
The answer is 3
Trang 21Maximizing Utility
• We try to spend our money on what will give us
the most utility!
– Remember, as we consume more of a good or service, its utility declines!
– This means that we will keep buying more of a good
or service until our MU falls to the level of the price
Price Purchased MU TU
$2.75 1 $2.75 $2.75 2.00 2 2.00 4.75 1.00 3 1.00 5.75 .25 4 .25 6.00
Units
The price is $2. How many units will you buy?
The answer is 2
Trang 22• We try to spend our money on what will give us
the most utility!
– Remember, as we consume more of a good or service, its utility declines!
– This means that we will keep buying more of a good
or service until our MU falls to the level of the price
Price Purchased MU TU
$2.75 1 $2.75 $2.75 2.00 2 2.00 4.75 1.00 3 1.00 5.75
Units
The answer is 2
The MU of the last unit purchased will always equal its price
Trang 24Price Purchased MU TU
$2.75 1 $2.75 $2.75 2.00 2 2.00 4.75 1.00 3 1.00 5.75 .25 4 .25 6.00
Trang 25$ 3.00 1 $3.00 $1.50 1 $1.50 $1.50 1 $1.50 2.00 2 2.00 1.00 2 1.00 .50 2 .50 1.00 3 1.00 .50 3 .50
Hamburgers Fries Coke
How many burgers, fries, and cokes would you consume if
burgers were $3, fries were $.50 and cokes were $.50?
Trang 26$ 3.00 1 $3.00 $1.50 1 $1.50 $1.50 1 $1.50 2.00 2 2.00 1.00 2 1.00 .50 2 .50 1.00 3 1.00 .50 3 .50
Hamburgers Fries Coke
How many burgers, fries, and cokes would you consume if
burgers were $3, fries were $.50 and cokes were $.50?
One hamburger; three fries; and two cokes
Trang 27$ 3.00 1 $3.00 $1.50 1 $1.50 $1.50 1 $1.50 2.00 2 2.00 1.00 2 1.00 .50 2 .50 1.00 3 1.00 .50 3 .50
Hamburgers Fries Coke
How many burgers, fries, and cokes would you consume if
burgers were $1, fries were $1.00 and cokes were $1.50?
Trang 29• Water, which is essential to life is cheap
– Water is abundant– A great deal of water is consumed
• Therefore the MU of the last gallon consumed is as low as its price, which is relatively low
• Diamonds are not essential to life, yet they are
very expensive
– Diamonds are scarce– People buy relatively few diamonds
• Therefore the MU of the last diamond purchased is as high
as its price, which is relatively very high
Muwater MUdiamonds
Trang 30Hamburger
Schedule
Trang 31Hamburger
Schedule
You would buy 4 @ .25 = $1.00
Trang 320 5 0The price of hamburgers is $0.25
Trang 330 5 0The price of hamburgers is $0.25
Trang 34Hamburger
Schedule
Trang 35Hamburger
Schedule
You would buy 2 @ 2.00 = $4.00
Trang 361.00 3 1.00 5.75 .25 4 .25 6.00
0 5 0Price of Hamburgers is $2.00
Hamburger
Schedule
You would buy 2 @ 2.00 = $4.00
You would have been willing to pay $4.75
Trang 370 5 0Price of Hamburgers is $2.00
Trang 38be the triangle area above the price lineD
Consumer Surplus
The consumer surplus in this graph would be represented by the area to the left of the
demand curve (what you would have been willing to pay) and above the price line
Trang 39be the triangle area above the price lineD
Consumer Surplus
The consumer surplus in this graph would be represented by the area to the left of the
demand curve (what you would have been willing to pay) and above the price line