Miller 14e Ppt20 Mic Abbrev
20
Chapter 20: Consumer Choice ECON 152 – PRINCIPLES OF MICROECONOMICS Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.
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Transcript of Miller 14e Ppt20 Mic Abbrev
Chapter 20:
Consumer Choice
ECON 152 – PRINCIPLES OF MICROECONOMICS
Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.
2
Utility Theory Utility
The want-satisfying power of a good or service
Utility Analysis The analysis of consumer decision making based
on utility maximization Util
A representative unit by which utilityis measured
3
Utility Theory
Marginal UtilityThe change in total utility due to
a one-unit change in the quantity of a good or service consumed
Marginal utility =change in total utility
change in number of units consumed
4
Total and Marginal Utilityof Watching DVDs
Figure 20-1, Panel (a)
5
Total and Marginal Utilityof Watching DVDs
Total utility ismaximized...
…where marginalutility equals zero.
Mar
gina
l Util
ity (
utils
per
wee
k)0
1 2 3 5 6 7
-4
-2
2
4
6
8
10
DVDs Watched per Week
4
DVDs Watched per Week
Tot
al U
tility
(ut
ils p
er w
eek
)
0 1 2 3 4 5 6 7
2
4
6
8
10
12
14
16
18
20
Figure 20-1, Panels (b) and (c)
6
Total and Marginal Utilityof Watching Videos Observations
Marginal utility falls as more is consumed Marginal utility equals zero when total utility
is at its maximum
7
Diminishing Marginal Utility
Diminishing Marginal UtilityThe principle that as more of any good
or service is consumed, its extra benefit declines
Increases in total utility from consumption of a good or service become smaller and smaller as more is consumed during a given time period
8
Consumer OptimumA choice of a set of goods and services that
maximizes the level of satisfaction for each consumer, subject to limited income
Optimizing Consumption Choices
9
Total Utility Marginal UtilityDVDs of DVDs per Marginal Utility per Dollar
per Period (utils) Spent (MUd/Pd)Period (utils) MUd (Price = $5)
0 0.0 —— ——
1 50.0 50.0 10.0
2 95.0 45.0 9.0
3 135.0 40.0 8.0
4 171.5 36.5 7.3
5 200.0 28.5 5.7
Total and Marginal Utility from Consuming DVDs and Pizza Slices on an Income of $26
Table 20-1
10
Total Utility Marginal UtilityPizza Slices of Pizza Slices Marginal Utility per Dollar
per per Period (utils) Spent (MUpPp)
Period (utils) MUp (price = $3)
0 0.0 —— ——
1 25 25 8.3
2 47 22 7.3
3 65 18 6.0
4 80 15 5.0
5 89 9 3.0
Total and Marginal Utility from Consuming DVDs and Pizza Slices on an Income of $26
Table 20-1
11
0 —— ——
1 10.0 8.3
2 9.0 7.3
3 8.0 6.0
4 7.3 5.0
5 5.7 3.0
Marginal Utility Marginal UtilityItems per Dollar per Dollarper Spent (DVD) Spent (Pizza)
Period (price = $5) (price = $3)
Total and Marginal Utility from Consuming DVDs and Pizza Slices on an Income of $26
Table 20-1
12
First DVD $26 - $5 = $21
Second DVD $21 - $5 = $16
First pizza slice $16 - $3 = $13
Third DVD $13 - $5 = $ 8
Fourth DVD and $8 - $5 = $ 3
Second pizza slice $3 - $3 = $ 0
Buying Decision Remaining Income
Steps to Consumer Optimum
Table 20-2
13
Optimizing Consumption Choices
A little mathThe rule of equal marginal utilities
per dollar spent A consumer maximizes personal satisfaction when
allocating money income in such a way that the last dollars spent on good A, good B, good C, and so on yield equal amounts of marginal utility
14
A little mathThe rule of equal marginal utilities per dollar
spent
Optimizing Consumption Choices
MU of good Aprice of good A
=MU of good B
price of good BMU of good Z
price of good Z= =...
15
How a Price ChangeAffects Consumer Optimum
Income = $26
Qd = 4MUd
Pd
36.55
= = 7.3
Qp = 2MUp
Pp
223
= = 7.3
16
How a Price ChangeAffects Consumer Optimum
Assume Price of DVDs Falls to $4
Qd = 4MUd
Pd
36.54
= = 9.13
Qp = 2MUp
Pp
223
= = 7.3
17
How a Price ChangeAffects Consumer Optimum
Assume Price of DVDs Falls to $4
Result Buy more DVDs and MUd falls
NowMUd
Pd
>MUp
Pp
18
DVD Rental Pricesand Marginal Utility
Figure 20-2
3
DVD Rentals per Week
D
210
4
5
Pric
e pe
r U
nit (
$ pe
r D
VD
)
B
A
19
How a Price ChangeAffects Consumer Optimum The Substitution Effect
The tendency of people to substitute cheaper commodities for more expensive commodities
Purchasing PowerThe value of money for buying goods and
services Real-Income Effect
The change in people’s purchasing power that occurs when, other things being constant, the price of one good that they purchase changes
Chapter 20:
Consumer Choice
ECON 152 – PRINCIPLES OF MICROECONOMICS
Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.
