Mcb-17e Micro Ch 7 v1-Consumer Behaviour

7/24/2019 Mcb-17e Micro Ch 7 v1-Consumer Behaviour

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Law of Diminishing Marginal UtilityTheory of Consumer Behavior Deriving the Demand Curve

Appliations and !"tensionsLast #ordAppendi"

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!nd %how

7ConsumerBehavior and

UtilityMa"imi&ation

Click to Link to Appendix 7: Indifference Curve Analysis



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Chapter ()*etives• Total Utility+ Marginal Utility+ and the Law

of Diminishing Marginal Utility• ,ow ational Consumers CompareMarginal Utility-to-.rie atios for.roduts in .urhasing Com)inationsto Ma"imi&e Total Utility

• ,ow to Derive the Demand Curve )y()serving Behavior

• ,ow the Utility-Ma"imi&ation Model,ighlights /nome and %u)stitution

!ffets of a .rie Change• Budget Lines+ /ndifferene Curves+

Utility Ma"imi&ation+ and DemandDerivation in the /ndifferene Curve

Model of Consumer Behavior






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Law of Diminishing MarginalUtility

• Terminology – Utility the satisfation or pleasure one gets from

onsuming produt

– Total Utility the total amount of satisfation orpleasure a person derives from onsuming somespeifi 2uantity

– Marginal Utility the extra satisfaction a consumerrealizes from an additional unit of that produt

• added satisfation delines as a onsumer a2uiresadditional units of a given produt

• A onsumer3s desire for an automo)ile+ when he or shehas none+ may )e very strong4 But the desire for aseond ar is less intense5 and for a third or fourth+wea6er and wea6er4

• Marginal Utility and Demand

Graphically…

( 741

741

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Law of Diminishing MarginalUtility

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Consumed.er Meal

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Total tility

!ar"inal tility

Units Consumed .er Meal

Units Consumed .er Meal



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!nd %how

Theory of Consumer Behavior • Consumer Choie and

Budget Constraint – ational Behavior use his or her money

inome to derive the greatest amount ofsatisfation+

– .referenes

!ah onsumer has lear-ut

preferenes for ertain of the goods and servies

– Budget Constraint onsumer has a fi"ed+limited amount of money inome

– .ries responds to proe hanges

• Utility Ma"imi&ing ule – Allocate !oney Income so that Last #ollar

$pent on %ach &roduct 'ields the $ame!ar"inal tility



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Theory of Consumer Behavior (umerical %xample:Utility-Ma"imi&ing Com)ination of .roduts

A and B ()taina)le with an /nome of ?19

=1>Unit of

.rodut

=a>Marginal

Utility+Utils

=a>Marginal

Utility+Utils

=)>Marginal

Utility.er Dollar [email protected]>

=)>Marginal


='>.rodut A.rie ?1

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irst

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Compare Marginal UtilitiesThen Compare .er Dollar - [email protected] the ,ighest

Che6 Budget - .roeed to e"t /tem


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Law of Diminishing Marginal UtilityTheory of Consumer Behavior Deriving the Demand CurveAppliations and !"tensionsLast #ordAppendi"

$ey Terms

!nd %how



=1>Unit of

.rodut

=a>Marginal

Utility+Utils

=a>Marginal

Utility+Utils

=)>Marginal


=)>Marginal


='>.rodut A.rie ?1

=0>.rodut B.rie ?'

irst

%eond

Third

ourth

ifth

%i"th

%eventh

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Again+ Compare .er Dollar - [email protected] the ,ighestBuy (ne of !ah E Budget ,as ?< Left.roeed to e"t /tem


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!nd %how



=1>Unit of

.rodut

=a>Marginal

Utility+Utils

=a>Marginal

Utility+Utils

=)>Marginal


=)>Marginal


='>.rodut A.rie ?1

=0>.rodut B.rie ?'

irst

%eond

Third

ourth

ifth

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Again+ Compare .er Dollar - [email protected] (ne More B E Budget ,as ?0 Left

.roeed to e"t /tem




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=1>Unit of

.rodut

=a>Marginal

Utility+Utils

=a>Marginal

Utility+Utils

=)>Marginal


=)>Marginal


='>.rodut A.rie ?1

=0>.rodut B.rie ?'

irst

%eond

Third

ourth

ifth

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%eventh

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Again+ Compare .er Dollar - [email protected]

Buy (ne of !ah E Budget !"hausted




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=1>Unit of

.rodut

=a>Marginal

Utility+Utils

=a>Marginal

Utility+Utils

=)>Marginal


=)>Marginal


='>.rodut A.rie ?1

=0>.rodut B.rie ?'

irst

%eond

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inal esult E At These .ries+

.urhase ' of /tem A and 8 of B # 741

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Theory of Consumer Behavior Al"e)raic *estatement:

MU of .rodut A

.rie of A

MU of .rodut B

.rie of B

: Utils

?1

1; Utils

?'

(ptimum Ahieved - !oney Income

is Allocated so that the Last #ollar

$pent on %ach &roduct 'ields the

$ame %xtra or !ar"inal tility




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Assignment

F 1 ' 0 8 Total

MU" 10 8 7 01

MUy '8 '9 1: 1; 7:

!ss"me that the income o# a cons"mer is $10% price o# & '$ 1% an( price o# ) ' $2* +lease calc"late how many o# &

an( ) m"st ,e ,o"ght to get maim"m "tility* Calc"latealso total "tility got ,y the cons"mer* +ro.e yo"r res"lt"sing the alge,ra e/"ation*




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.

r i e o f . r o d u

t B

9

1

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8 ;

Fuantity Demanded of B

Deriving the Demand Curve$ame (umeric %xample:

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1

8

;

.rie .er

Unit of B

Fuantity

Demanded

#+Income %ffects

$u)stitution %ffects

( 74'





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Appliations and !"tensions

• DGDs and DGD .layers

• The Diamond-#ater .arado" – water is in great supply the marginal utility of the

last unit of water onsumed is very lowwillingness to pay is low

• The Galue of Time

• Medial Care .urhases

• Cash and onash ifts

( 740





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Criminal Behavior

• !onomi Analysis (ffers /nsights /nto .ropertyCrimes %uh as o))ery+ Burglary+ and Auto Theft

• Theory of a ational Consumer • Buy Gersus %teal Deision• Compare Marginal Utility of /tem Gersus Costs E

uilt+ ines+ or .rison Time

• Crime May Be edued )y H/nreasingI the H.rie ofCrimeI

L a s t

W o r d




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!nd %how

,ey Terms

• law of diminishing marginal utilit

y• utility

• total utility

• marginal utility• rational )ehavior

• )udget onstraint

• utility-ma"imi&ing rule• inome effet

• su)stitution effet


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!nd %how

(ext Chapter &revie-…

The Costs of .rodution

Click to Link to Appendix 7: Indifference Curve Analysis





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!nd %how

/ndifferene Curve Analysis• Budget Line .Constraint/: a shedule or urve showing

various om)inations of two produts a onsumer an

purhase with a speifi money inome4• $u)0ect to:

– /nome Changes – .rie Changes

*eturn to Chapter 7

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F u a n t i t y o f A

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:

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9

Fuantity of B

Units of A=.rie ?14<9> Units of B=.rie ?1> Total!"penditure

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=Unattaina)le>

/nome ?1'

& A ?14<9

/nome ?1'

& + ?1

Appendi"

/ndifferene Curve AnalysisDemand CurveAppendi" Terms



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!nd %how

• !s income increases% ,"(get line will shi#t o"twar( shows

that cons"mers co"l( ,"y an( cons"me more pro("cts*• !s income (ecreases% ,"(get line will shi#t inwar( shows

that cons"mers co"l( ,"y an( cons"me less amo"nt o#pro("cts*

!!

00

3ncomeincreases 3ncome

(ecreases





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!nd %how

• !s price o# a pro("ct increases 4while price o# other

pro("ct remain constant5% ,"(get line will rotate inwar(shows that cons"mers ,"y an( cons"me less pro("ctwhich has price increases*

• !s price o# a pro("ct (ecreases 4while price o# otherpro("ct remain constant5% ,"(get line will rotate o"twar(

shows that cons"mers ,"y an( cons"me more pro("ctwhich has price (ecreases*

!!

0 0

+rice o#+ro("ct !3ncrease

+rice o# +ro("ct 3ncrease



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!nd %how

!

0 0

+rice o#+ro("ct !

(ecreases

+rice o# +ro("ct

(ecreases

!





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!nd %how

/ndifferene Curve Analysis• /ndifferene urve all the om)inations of

two produts A and B that will yield the same

total satisfation or total utility to a onsumer4

*eturn to Chapter 7

' 8 ; : 19 1'


;

:

19

1'

8

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9

Fuantity of B

Com)ination Units of A Units of B

*

6

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8

0

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8

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0

k

l m

( 748

I

Appendi"









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• Charateristis

– Downsloping to inrease onsumption of produtA+ onsumption of produt B must )e deresed4 – Conve" to (rigin the amount of produt B that are

sarifiied to inrease onsumption of produt Awill )e less and less4

– Marginal ate of %u)stitution =M%> the ratio ofthe amount of produt that is sarifiied and thatamount of produt that the onsumption isinreased4

• the onsumer is willing to forgo ; units of A to get 'more units of B5 the M% is ;@' or 0+ for the

– !ah urve reflets a different level of total utility

and therefore never rosses another indiffereneurve



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!nd %how

/ndifferene Curve Analysis• The /ndifferene Map

• !2uili)rium .osition at Tangeny

*eturn to Chapter 7

' 8 ; : 19 1'


;

:

19

1'

8

'

9

Fuantity of B

I 1I 2

I 3

I 4

5

6 &referred +ut *e8uires!ore Income

M% & +

& A

Appendi"




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Assignment

• .lease draw the graph that shown ma"imum

utility aording to ordinal approah4 Andthen draw the new graph of ma"imum utilitywhen prie of J is derease4 ive thee"planation of your urve4





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Derivation of the Demand Curve• Measurement of Utility

. r i e o

f B

?14<9

1499

4<9

1 ' 0 8 < ; 7 : 19111'

Fuantity of B

Marginal Utilityof A

Marginal Utilityof B

.rie of A .rie of B

5

' 8 ; : 19 1'


;

:

19

1'

8

'

9

Fuantity of B

I 2

I 3

#+

At ?1 .rie for B+; Units are .urhasedeord the esultsAs .rie of B /nreasesto ?14<9+(nly 0 Units of B are

Boughteord the esultsConnet the .oints toCreate the DemandCurve

Appendi"

*eturn to Chapter 7




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Appendi" $ey Terms

• )udget line• indifferene urve

• marginal rate ofsu)stitution =M%>

• indifferene map

• e2uili)rium position

*eturn to Chapter 7

Appendi"

/ndiffereneCurve AnalysisDemand CurveAppendi" Terms




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!nd %how

(ext Chapter &revie-…

The Costs of .rodution

*eturn to Chapter 7

/ndiffereneCurve AnalysisDemand CurveAppendi" Terms

Mcb-17e Micro Ch 7 v1-Consumer Behaviour

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