Professional Documents
Culture Documents
Some Questions
What is behind a consumers demand
curve?
How do consumers choose from among
various consumer goods?
What determines the value of a consumer
good?
Utility
The value a consumer places on a unit of a good or
service depends on the pleasure or satisfaction he or she
expects to derive form having or consuming it at the
point of making a consumption (consumer) choice.
In economics the satisfaction or pleasure consumers
derive from the consumption of consumer goods is called
utility.
Consumers, however, cannot have every thing they wish
to have. Consumers choices are constrained by their
incomes.
Within the limits of their incomes, consumers make their
consumption choices by evaluating and comparing
consumer goods with regard to their utilities.
Jack derives 10 utils from having one slice of pizza but only 5 utils from
having a burger.
($) TU
0
40
85
120
140
150
157
160
160
155
145
($) MU
40
45
35
20
10
7
3
0
-5
-10
145
Total Utility
200
150
100
50
0
1
10 11
($) M U
50
40
30
20
10
0
-10
-20
11
Q
0
1
2
3
4
5
6
7
8
9
10
($) TU
0
40
85
120
140
150
157
160
160
155
145
($) MU
40
45
35
20
10
7
3
0
-5
-10
145
More facts
The prices of hamburger and ice cream are marketgiven; the consumer cannot change the price of a good.
Jill, like any other rational consumer, wishes to
maximize her utility.
The opportunity cost of one dollar spent on ice cream is
the forgone utility of one dollar that could be on
hamburger.
If the utility of one additional dollar of ice cream is
greater than the utility of the last dollar spent on
hamburger, Jill can increase her total utility by spending
one dollar less on hamburger and one dollar more one
ice cream.
Hamburger or Hotdog
If based on their perceived marginal utilities
Jill values a hamburger four times as much
as a hotdog, but the market price of a burger
is eight times the price of a hotdog, she will
buy a hotdog. That is because one dollars
worth of hotdogs would give her more
utility that one dollars worth of burgers.
That is:
MUD/PD > MUH/PH
MUH
--------- = ---------$PI
$PH
Q
1
2
3
4
5
6
7
8
MUI
40
45
35
20
10
7
3
0
PI
10
10
10
10
10
10
10
10
Hamburger
o
14.33
An Optimal Change
Recall that to maximize utility a consumer
would set:
(MUx/Px) = (MUy/Py)
If Px increases this equality would be
disturbed: (MUx/Px) < (MUy/Py)
To return to equality the consumer must adjust
his/her consumption. (Have in mind that the
consumer cannot change prices, and he/she has
an income constraint.)
What are the consumers options?
Substitution effect
Buying less X and substituting it with Y until the optimizing
condition is restored (-)
As Px increases, Qx decreases
Consumer Surplus
The difference between what a consumer is
willing to pay for an addition unit of a good
and the market price that he/she actually
pays is referred to as consumer surplus.
The area between the demand curve and the
price (line) measures the total consumer
surplus.
Consumer Surplus
P
Price
D
0
Qx
Consumer Surplus
Price
P
D
0
Qx
Indifference Curves
Y
Slope = Change in Y/Change in X
= MUx/MUy
U4
U3
U2
U1
O
Budget Line
Y
Income = Px .Qx + Py. Qy
I/Py
Slope = Px/Py
X
O
I/Px
Indifference Curves
Y
MRS = MUx/MUy= Px/Py
a
b
c
U4
U3
U2
d
e
O
U1
a
b
Y1
Yo
U5
U4
c
U3
d
e
O
Xo
X1
U2
U1
a
b
Y1
Yo
C
c
U5
U4
U3
d
e
O
Xo
X1
U2
U1