The Law of Demand

Law of Diminishing
Marginal Utility
Total and Marginal U
tility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
21 CHAPTER

Utility Maximization
and the Demand Cur
ve
Applications and Exte
nsions
Key Terms

Consumer Behavior and

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Copyright McGraw-Hill/Irwin, 2005
 THE LAW OF DEMAND
The Law of Demand
Law of Diminishing
A Closer Look…
The Income Effect
Marginal Utility
Total and Marginal U
tility
Theory of Consumer
Behavior
A lower price frees income
Utility Maximizing C
ombination for additional purchases -
Utility Maximization
and the Demand Cur
ve
and vice versa
Applications and Exte

The Substitution Effect

nsions
Key Terms

A lower price relative to other

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goods attracts new buyers -
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and vice versa
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Copyright McGraw-Hill/Irwin, 2005
 LAW OF DIMINISHING
The Law of Demand MARGINAL UTILITY
• Utility Defined
Law of Diminishing
Marginal Utility
Total and Marginal U
tility
Theory of Consumer
Behavior
Utility Maximizing C
• Subjective Nature
• Difficult to Quantify
ombination
Utility Maximization
and the Demand Cur
ve

Total Utility
Applications and Exte
nsions
Key Terms

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Marginal Utility
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End
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graphically examined..
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Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
Tacos Total Marginal
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing per meal Utils Utils
Marginal Utility
20
Total and Marginal U
tility
Theory of Consumer
0 0
Behavior
Utility Maximizing C
1 10 10

ombination
Utility Maximization
and the Demand Cur
ve 0 1 2 3 4 5 6 7
Applications and Exte
nsions Units consumed per meal

Marginal Utility (utils)

Key Terms
10
8
6
4
2
Previous Next 0
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End 1 2 3 4 5 6 7
Show Units consumed per meal
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Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
Tacos Total Marginal
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing per meal Utils Utils
Marginal Utility
20
Total and Marginal U
tility
0 0
Theory of Consumer
10
Behavior
Utility Maximizing C
1 10 10

ombination
Utility Maximization
and the Demand Cur
ve 0 1 2 3 4 5 6 7
Applications and Exte
nsions Units consumed per meal

Marginal Utility (utils)

Key Terms
10
8
6
4
2
Previous Next 0
Slide Slide -2
End 1 2 3 4 5 6 7
Show Units consumed per meal
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Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
Tacos Total Marginal
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing per meal Utils Utils
Marginal Utility
20
Total and Marginal U
tility
0 0
Theory of Consumer
10
Behavior
1 10 10
Utility Maximizing C
8
2 18
ombination
Utility Maximization
and the Demand Cur
ve 0 1 2 3 4 5 6 7
Applications and Exte
nsions Units consumed per meal

Marginal Utility (utils)

Key Terms
10
8
6
4
2
Previous Next 0
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End 1 2 3 4 5 6 7
Show Units consumed per meal
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Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
Tacos Total Marginal
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing per meal Utils Utils
Marginal Utility
20
Total and Marginal U
tility
0 0
Theory of Consumer
10
Behavior
1 10 10
Utility Maximizing C
8
2 18
ombination
Utility Maximization
and the Demand Cur 6
ve
Applications and Exte
3 24 0 1 2 3 4 5 6 7

nsions Units consumed per meal

Marginal Utility (utils)

Key Terms
10
8
6
4
2
Previous Next 0
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End 1 2 3 4 5 6 7
Show Units consumed per meal
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Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
Tacos Total Marginal
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing per meal Utils Utils
Marginal Utility
20
Total and Marginal U
tility
0 0
Theory of Consumer
10
Behavior
1 10 10
Utility Maximizing C
8
2 18
ombination
Utility Maximization
and the Demand Cur 6
ve
3 24 0 1 2 3 4 5 6 7
Applications and Exte
4
4 28
nsions Units consumed per meal

Marginal Utility (utils)

Key Terms
10
8
6
4
2
Previous Next 0
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End 1 2 3 4 5 6 7
Show Units consumed per meal
21 - 8
Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
Tacos Total Marginal
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing per meal Utils Utils
Marginal Utility
20
Total and Marginal U
tility
0 0
Theory of Consumer
10
Behavior
1 10 10
Utility Maximizing C
8
2 18
ombination
Utility Maximization
and the Demand Cur 6
ve
3 24 0 1 2 3 4 5 6 7
Applications and Exte
4
4 28
nsions Units consumed per meal

Marginal Utility (utils)

10
Key Terms
2 8
5 30 6
4
2
Previous Next 0
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End 1 2 3 4 5 6 7
Show Units consumed per meal
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Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
Tacos Total Marginal
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing per meal Utils Utils
Marginal Utility
20
Total and Marginal U
tility
0 0
Theory of Consumer
10
Behavior
1 10 10
Utility Maximizing C
8
2 18
ombination
Utility Maximization
and the Demand Cur 6
ve
3 24 0 1 2 3 4 5 6 7
Applications and Exte
4
4 28
nsions Units consumed per meal

Marginal Utility (utils)

10
Key Terms
2 8
5 30 6
0 4

Previous Next 6 30 2
0
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Show Units consumed per meal
21 - 10
Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
Tacos Total Marginal TU
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing per meal Utils Utils
Marginal Utility
20
Total and Marginal U
tility
0 0
Theory of Consumer
10
Behavior
1 10 10
Utility Maximizing C
8
2 18
ombination
Utility Maximization
and the Demand Cur 6
ve
3 24 0 1 2 3 4 5 6 7
Applications and Exte
4
4 28
nsions Units consumed per meal

Marginal Utility (utils)

10
Key Terms
2 8
5 30 6
0 4
6 30 2
Previous Next
-2 0
MU
7 28
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End 1 2 3 4 5 6 7
Show Units consumed per meal
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Copyright McGraw-Hill/Irwin, 2005
 TOTAL AND MARGINAL UTILITY
Tacos Total Marginal TU
The Law of Demand consumed Utility, Utility, 30

Total Utility (utils)

Law of Diminishing per meal Utils Utils
Marginal Utility
Total and Marginal U
tility
0 0
20
Observe
Theory of Consumer
10 Diminishing
Behavior
1 10 10
Utility Maximizing C
8
ombination
2 18 Marginal
Utility Maximization
and the Demand Cur 6
ve
3 24 0 1
Utility
2 3 4 5 6 7
Applications and Exte
4
4 28
nsions Units consumed per meal

Marginal Utility (utils)

10
Key Terms
2 8
5 30 6
0 4
6 30 2
Previous Next
-2 0
MU
7 28
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Show Units consumed per meal
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Copyright McGraw-Hill/Irwin, 2005
 THEORY OF CONSUMER BEHAVIOR
The Law of Demand
Consumer Choice and
Law of Diminishing
Marginal Utility
Total and Marginal U
tility
Budget Constraint
Theory of Consumer
Behavior
• Rational Behavior
• Clear-Cut Preferences
Utility Maximizing C
ombination
Utility Maximization
and the Demand Cur
ve
Applications and Exte
nsions
• Subject to a Budget
Key Terms
Constraint
Previous Next
• Responds to Price
Changes
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Copyright McGraw-Hill/Irwin, 2005
 THEORY OF CONSUMER BEHAVIOR
The Law of Demand Utility Maximizing Rule
Law of Diminishing

The consumer’s money

Marginal Utility
Total and Marginal U
tility
Theory of Consumer
Behavior
Utility Maximizing C
income should be allocated
so that the last dollar spent
ombination
Utility Maximization
and the Demand Cur
ve
Applications and Exte
nsions on each product yields the
same amount of extra
Key Terms

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(marginal) utility.
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Copyright McGraw-Hill/Irwin, 2005
Illustrated...
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal U
tility
Unit of utility, dollar utility, dollar
Theory of Consumer product utils (MU/price) utils (MU/price)
Behavior
Utility Maximizing C
ombination First 10 10 24 12
Utility Maximization
and the Demand Cur
ve
Applications and Exte
nsions
Key Terms

How should the $10

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income be allocated?
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Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal U
tility
Unit of utility, dollar utility, dollar
Theory of Consumer product utils (MU/price) utils (MU/price)
Behavior
Utility Maximizing C
ombination First 10 10 24 12
Utility Maximization
and the Demand Cur
ve
Applications and Exte

Examine the two

nsions
Key Terms

Previous Next
marginal utilities
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Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal U
tility
Unit of utility, dollar utility, dollar
Theory of Consumer product utils (MU/price) utils (MU/price)
Behavior
Utility Maximizing C
ombination First 10 10 24 12
Utility Maximization
and the Demand Cur
ve
Applications and Exte

Examine the two

nsions
Key Terms

Previous Next
marginal utilities
…per dollar
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Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal U
tility
Unit of utility, dollar utility, dollar
Theory of Consumer product utils (MU/price) utils (MU/price)
Behavior
Utility Maximizing C
ombination First 10 10 24 12
Utility Maximization
and the Demand Cur
ve
Applications and Exte

Decision: Buy 1
nsions
Key Terms

Previous Next
Product B for $2
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Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal U
tility
Unit of utility, dollar utility, dollar
Theory of Consumer product utils (MU/price) utils (MU/price)
Behavior
Utility Maximizing C
ombination First 10 10 24 12
Utility Maximization
and the Demand Cur
ve Second 8 8 20 10
Applications and Exte
nsions Third 7 7 18 9
Fourth What next?
Key Terms
6 6 16 8
Previous Next
Fifth 5 5 12 6
Slide Slide
Sixth 4 4 6 3
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Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal U
tility
Unit of utility, dollar utility, dollar
Theory of Consumer product utils (MU/price) utils (MU/price)
Behavior
Utility Maximizing C
ombination First 10 10 24 12
Utility Maximization
and the Demand Cur
ve Second 8 8 20 10
Applications and Exte
nsions Third 7 7 18 9
Fourth What next?
Key Terms
6 6 16 8
Fifth 5 5 12 6
Previous Next Buy one of each
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Sixth 4 4 6 3
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Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal U
tility
Unit of utility, dollar utility, dollar
Theory of Consumer product utils (MU/price) utils (MU/price)
Behavior
Utility Maximizing C
ombination First 10 10 24 12
Utility Maximization
and the Demand Cur
ve Second 8 8 20 10
Applications and Exte
nsions Third 7 7 18 9
Key Terms
Fourth 6 6 16 8
Fifth
and
5
then...
5 12 6
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Sixth ($5 left)
4 4 6 3
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Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal U
tility
Unit of utility, dollar utility, dollar
Theory of Consumer product utils (MU/price) utils (MU/price)
Behavior
Utility Maximizing C
ombination First 10 10 24 12
Utility Maximization
and the Demand Cur
ve Second 8 8 20 10
Applications and Exte
nsions Third 7 7 18 9
Key Terms
Fourth 6 6 16 8
Fifth third
5 unit
5 of
12 6
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End
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Sixth product
4 4 B 6 3
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Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal U
tility
Unit of utility, dollar utility, dollar
Theory of Consumer product utils (MU/price) utils (MU/price)
Behavior
Utility Maximizing C
ombination First 10 10 24 12
Utility Maximization
and the Demand Cur
ve Second 8 8 20 10
Applications and Exte
nsions Third 7 7 18 9
Key Terms
Fourth 6
$3 left... 6 16 8
Previous Next
Fifth 5 5 12 6
Slide Slide
Sixth 4 4 6 3
End
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Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal U
tility
Unit of utility, dollar utility, dollar
Theory of Consumer product utils (MU/price) utils (MU/price)
Behavior
Utility Maximizing C
ombination First 10 10 24 12
Utility Maximization
and the Demand Cur
ve Second 8 8 20 10
Applications and Exte
nsions Third 7 7 18 9
Key Terms
Fourth 6
$3 left... 6 16 8
Fifth 5 5 12 6
Previous
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Next
Slide Buy
Sixth both!
4 4 6 3
End
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Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal U
tility
Unit of utility, dollar utility, dollar
Theory of Consumer product utils (MU/price) utils (MU/price)
Behavior
Utility Maximizing C
ombination First 10 10 24 12
Utility Maximization
and the Demand Cur
ve Second 8 8 20 10
Applications and Exte
nsions Third 7
Income is gone... 7 18 9
Key Terms
Fourth
the last dollar 6spent on6 16 8
each good gave the same
Fifth 5 5 12 6
Previous Next utility (8) per dollar
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Sixth 4 4 6 3
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Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZING COMBINATION

The Law of Demand

Law of Diminishing
Marginal Utility
Algebraic Restatement of the
Total and Marginal U
tility
Utility Maximization Rule
Theory of Consumer
Behavior
Utility Maximizing C
ombination MU of product A MU of product B
Utility Maximization
and the Demand Cur
ve
Applications and Exte Price of A
= Price of B
nsions
Key Terms

8 Utils 16 Utils
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Next
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$1
= $2
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Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZATION AND
The Law of Demand
THE DEMAND CURVE
Law of Diminishing
Marginal Utility Deriving the Demand Schedule
Total and Marginal U
tility
Theory of Consumer
and Curve
Behavior
Utility Maximizing C
ombination Given from the previous example schedule:
Utility Maximization
and the Demand Cur
ve
Applications and Exte
• Preferences or Tastes
• Money Income
nsions
Key Terms

Previous Next
• Prices of Other Goods
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Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZATION AND
The Law of Demand
THE DEMAND CURVE
Law of Diminishing
Marginal Utility Deriving the Demand Schedule
Total and Marginal U
tility
Theory of Consumer
and Curve
Create a demand schedule from the
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Cur
purchase decisions as the price of
the product is varied ...
ve
Applications and Exte
nsions
Key Terms
Price per unit of B Quantity Demanded
$2 4
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Copyright McGraw-Hill/Irwin, 2005
Graphically…
 UTILITY MAXIMIZATION AND
THE DEMAND CURVE
Deriving the Demand Schedule
The Law of Demand
Law of Diminishing
Marginal Utility
Total and Marginal U
tility
and Curve
Theory of Consumer
Behavior
Utility Maximizing C Price per unit of Good B
$2
ombination
Utility Maximization
and the Demand Cur
ve
Applications and Exte
nsions
Key Terms 1

Previous Next DB
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21 - 29 Quantity Demanded of Good B
Copyright McGraw-Hill/Irwin, 2005
 UTILITY MAXIMIZATION AND
THE DEMAND CURVE
Deriving the Demand Schedule
The Law of Demand
Law of Diminishing
Marginal Utility
Total and Marginal U and Curve
Income and
tility
Theory of Consumer
Behavior
Utility Maximizing C $2 Price per unit of Good B
ombination
Utility Maximization
and the Demand Cur
ve
Substitution Effects
Applications and Exte
nsions
Key Terms
Revisited
1

Previous Next DB
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End 0
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21 - 30 Quantity Demanded of Good B
Copyright McGraw-Hill/Irwin, 2005
 APPLICATIONS AND EXTENSIONS
The Law of Demand
Law of Diminishing
DVDs and DVD Players
The Diamond-Water
Marginal Utility
Total and Marginal U
tility
Theory of Consumer
Behavior
Utility Maximizing C
Paradox
ombination
Utility Maximization
and the Demand Cur
The Value of Time
Medical Care Purchases
ve
Applications and Exte
nsions
Key Terms
Cash and Noncash Gifts
Previous Next
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End
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Copyright McGraw-Hill/Irwin, 2005
income effect
substitution effect
utility
total utility
marginal utility
law of diminishing marginal utility
rational behavior
budget constraint
utility-maximizing rule
Copyright McGraw-Hill/Irwin, Inc. 2005 BACK END
The Law of Demand
Law of Diminishing
Marginal Utility
Next…
Total and Marginal U
tility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Cur
ve
Applications and Exte
nsions
Key Terms

Previous
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Next
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Indifference Curve Analysis
End
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Copyright McGraw-Hill/Irwin, 2005