Consumer Behavior

Ch. 7

Introduction

We have already seen and used an individual’s demand curve. Now, want to explain in more detail why it slopes downward Why do people demand goods and services?
• •

Receive satisfaction or pleasure from consuming the good. Economists terms this satisfaction utility.

others hate it.  Example: • • Some people like jazz. how many jazz music CD’s might they purchase. we are not try to explain why people get utility from certain goods. . We take that as a given. Economists say given an individual’s preferences about jazz.Introduction  In economics.

Total and Marginal Utility  Total Utility (TU) .relates consumption of a good to the utility derived from consuming a good. (This could be many units of a good) Marginal Utility (MU) .the change in total utility when consumption of a good changes by one unit. •  MU = DTU / D Q consumed of a good .

. ceteris paribus. a point is reached where the marginal utility obtained by consuming additional units of a good starts to decline.eventually.Law of Diminishing Marginal Utility  Law of Diminishing Marginal Utility .

. I get a lot of satisfaction from first slice of pizza.Law of Diminishing Marginal Utility  Example • • If I’m really hungry. the satisfaction from the 8th slice would be much less than that of the first slice. If I keep eating pizza.

Law of Diminishing MU Notes about the Law of Diminishing MU  Time period must be specified for law.” • Slope of the total utility curve is equal to marginal utility .  Law tells us that eventually the total utility curve will become “flatter.  Law tells us that eventually the marginal utility curve will be downward sloping.

Marginal Utility MU MU Q .

Shape of MU  Eventually downward sloping • Law of diminishing marginal utility  Positive always • Rational behavior • Consumer only purchases a good if they get some positive utility from it. .

Total Utility TU TU DQ DTU DTU DQ Q .

Shape of TU  Positive slope • Consumer only purchases a good if gets some positive amount of utility (rational behavior)  Slope gets flatter as Q increases • Law of diminishing marginal utility .

Consumer Equilibrium Now that we understand the concepts of utility theory .we will use them to explain how consumers make decisions about what to buy .

I have to weigh the price of the good in my decision as well . I would much rather have a Jaguar instead of my Honda If I want to maximize my utility. I don’t just pick the thing that gives me the most pleasure.Consumer Equilibrium   For instance. why don’t I buy a Jaguar?  Because it costs a lot more than the Honda  So if I want to maximize my utility.

Consumer Equilibrium So how can I compare a Jaguar and a Honda? It’s like comparing apples and oranges. Instead. I need to somehow make them both comparable. .

So if I want to spend my money wisely. I can see that even though the Jag gives me more utility. I buy the thing that gives me more utility per dollar. .Consumer Equilbrium In order to do that I will need to convert utility to utility per dollar. I get more utility per dollar from the Honda. This way.

Consumer Equilibrium Let’s say I walk down to the cafeteria for lunch and they have Pizza and Ice Cream. I have $7 in my pocket What do I buy?  .  The pizza is $1 a slice and the Ice Cream is $2 a scoop.

Consumer Equilibrium Remember. I want to choose the combination of pizza and Ice Cream that gives me the greatest possible utility for my $7  Consider the following table. which states the total utility I get from all possible quantities of Pizza and Ice Cream  .

Marginal Util. Total Util. Marginal Util. 0 1 2 3 4 5 6 0 24 44 60 70 72 72 -- 0 29 46 56 58 59 59 -- .Utility Table Ice Cream Pizza Quantity Total Util.

Utility Table Ice Cream Pizza Quantity Total Util. Marginal Util. Marginal Util. Total Util. 0 1 2 3 4 5 6 0 24 44 60 70 72 72 24 20 16 10 2 0 -- 0 29 46 56 58 59 59 29 17 10 2 1 0 -- .

So I want to buy the pizza. Consider the first scoop of ice cream MU 12 per dollar. I have $5. Now I have $6. . I will want to buy the second slice of pizza.Consumer Equilibrium    We need to find the marginal utility per dollar for both goods. Now I have to compare my second slice of pizza (MU is 17 /$) with the first scoop of ice cream (MU is 12 /$). MU of the first slice of pizza 29 per dollar.

It doesn’t matter which I pick.Consumer Equilibrium   Now I have to compare the third slice o pizza (MU 10/$) with the first scoop of ice cream (MU 12/$). I will want to buy the ice cream. Now I have $2 . I have $3. since they make me equally happy. Now I have to compare the third slice of pizza (MU 10 /$) with the second scoop of ice cream (MU 10 /$). I’ll take the pizza.

My total utility from lunch is 56+44=100. I bought 3 slices of pizza which give a total utility of 56 and 2 scoops of ice cream which give a total utility of 44. I will want to buy the ice cream. I have no more money. There is no other combination of pizza and ice cream that give a greater utility for $7.Consumer Equilbrium   Now I have to compare the fourth slice of pizza (MU is 2/$) to the second scoop of ice cream (MU is 10 /$). .

. Assignment: Convince yourself that I will buy 4 scoops of ice cream and 4 slices of pizza. Note that when the price went down.Consumer Equilbrium    What if the price of the ice cream dropped to $1 a scoop.THIS IS WHERE THE LAW OF DEMAND COMES FROM. I bought more .

Consumer Equilibrium     In summary. . you need to convert marginal utility to marginal utility per dollar Then compare MU/P for the two goods and buy the one that gives the greatest MU/P Subtract the price from your budget Compare the next available units of both goods and repeat the process until you are out of money.

the difference between the price buyers pay for a good and the maximum amount they would have paid for the good. Example: • • •  I’m willing to pay $6 for a case of soda Soda is on sale for $5 a case Consumer surplus = $1 .Consumer Surplus  Consumer Surplus .

Consumer Surplus P $9 This is the Consumer Surplus for the second case of soda S $7 $5 D 0 1 2 3 Q .

Consumer Surplus Here is the generally accepted method of finding the total Consumer Surplus in a market .

Consumer Surplus P The area of this triangle is the total Consumer Surplus S P* D 0 Q* Q .

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