Law of Dimini

shing Margina
l Utility
Theory of Con
sumer Behavi
or
Deriving the D
emand Curve
Applications a
19
nd Extensions
Last Word
Appendix
Consumer
Behavior and
Utility
Key Terms Maximization
End Show
Click to Link to Appendix 19: Indifference Curve Analysis
19-1 Copyright 2008 The McGraw-Hill Companies
 Chapter Objectives
• Total Utility, Marginal Utility, and the
Law of Dimini
shing Margina
Law of Diminishing Marginal Utility
l Utility • How Rational Consumers Compare
Theory of Con
sumer Behavi
or
Marginal Utility-to-Price Ratios for
Deriving the D Products in Purchasing Combinations
emand Curve
Applications a to Maximize Total Utility
nd Extensions
Last Word • How to Derive the Demand Curve by
Appendix
Observing Behavior
• How the Utility-Maximization Model
Highlights Income and Substitution
Effects of a Price Change
• Budget Lines, Indifference Curves,
Key Terms
Utility Maximization, and Demand
Derivation in the Indifference Curve
End Show
Model of Consumer Behavior
19-2 Copyright 2008 The McGraw-Hill Companies
 Law of Diminishing Marginal
Utility
Law of Dimini
shing Margina
l Utility
• Terminology O 19.1

–Utility
Theory of Con
sumer Behavi
or
Deriving the D

–Total Utility
emand Curve
Applications a
nd Extensions
Last Word
Appendix
–Marginal Utility
G 19.1

• Marginal Utility and

Demand
Graphically…
Key Terms

End Show

19-3 Copyright 2008 The McGraw-Hill Companies

 Law of Diminishing Marginal
Utility Total Utility
Law of Dimini
shing Margina
l Utility 30

Total Utility (Utils)

(1) (2) (3)
Theory of Con Tacos Total Marginal
sumer Behavi Consumed Utility, Utility, TR
or Per Meal Utils Utils 20
Deriving the D
emand Curve
0 0
Applications a
nd Extensions ] 10 10
1 10
Last Word
Appendix
] 8
2 18
] 6 0 1 2 3 4 5 6 7
3 24 Units Consumed Per Meal
] 4

Marginal Utility (Utils)

Marginal Utility
4 28
5 30
] 2 10

6 30
] 0 8
6
7 28
] -2 4
2
Key Terms
0
-2 MU
End Show 1 2 3 4 5 6 7
Units Consumed Per Meal
19-4 Copyright 2008 The McGraw-Hill Companies
 Theory of Consumer Behavior
• Consumer Choice and
Law of Dimini
shing Margina
l Utility
Budget Constraint
Theory of Con
sumer Behavi
– Rational Behavior
or
Deriving the D
emand Curve
– Preferences
Applications a
nd Extensions
Last Word
– Budget Constraint
Appendix
– Prices
• Utility Maximizing Rule
– Allocate Money Income so
that Last Dollar Spent on
Key Terms Each Product Yields the
End Show Same Marginal Utility
19-5 Copyright 2008 The McGraw-Hill Companies
 Theory of Consumer Behavior
Numerical Example:
Utility-Maximizing Combination of Products
Law of Dimini
shing Margina A and B Obtainable with an Income of $10
l Utility
Theory of Con (2) (3)
sumer Behavi Product A: Product B:
or
Price = $1 Price = $2
Deriving the D
emand Curve (b) (b)
Applications a (a) Marginal (a) Marginal
nd Extensions (1) Marginal Utility Marginal Utility
Last Word
Appendix
Unit of Utility, Per Dollar Utility, Per Dollar
Product Utils (MU/Price) Utils (MU/Price)
First 10 10 24 12
Second 8 8 20 10
Third 7 7 18 9
Compare Marginal Utilities
Fourth 6 6 16 8
Then Compare
Fifth 5
Per Dollar
5
- MU/Price
12 6
Key Terms
Choose the4Highest4
Sixth 6 3
End Show
Check Budget
Seventh 3 - Proceed
3 to Next
4 Item2
19-6 Copyright 2008 The McGraw-Hill Companies
 Theory of Consumer Behavior
Numerical Example:
Utility-Maximizing Combination of Products
Law of Dimini
shing Margina A and B Obtainable with an Income of $10
l Utility
Theory of Con (2) (3)
sumer Behavi Product A: Product B:
or
Price = $1 Price = $2
Deriving the D
emand Curve (b) (b)
Applications a (a) Marginal (a) Marginal
nd Extensions (1) Marginal Utility Marginal Utility
Last Word
Appendix
Unit of Utility, Per Dollar Utility, Per Dollar
Product Utils (MU/Price) Utils (MU/Price)
First 10 10 24 12
Second 8 8 20 10
Third 7 7 18 9
Again, Compare Per Dollar - MU/Price
Fourth 6 6 16 8
Choose
Fifth
the5Highest5 12 6
Key Terms
Buy
Sixth One of 4Each – Budget
4 Has
6 $5 Left
3
End Show
Proceed
Seventh to 3Next Item
3 4 2
19-7 Copyright 2008 The McGraw-Hill Companies
 Theory of Consumer Behavior
Numerical Example:
Utility-Maximizing Combination of Products
Law of Dimini
shing Margina A and B Obtainable with an Income of $10
l Utility
Theory of Con (2) (3)
sumer Behavi Product A: Product B:
or
Price = $1 Price = $2
Deriving the D
emand Curve (b) (b)
Applications a (a) Marginal (a) Marginal
nd Extensions (1) Marginal Utility Marginal Utility
Last Word
Appendix
Unit of Utility, Per Dollar Utility, Per Dollar
Product Utils (MU/Price) Utils (MU/Price)
First 10 10 24 12
Second 8 8 20 10
Third 7 7 18 9
Fourth 6 6 16 8
Again, Compare Per Dollar - MU/Price
Key Terms Fifth 5 5 12 6
Buy
Sixth
One More
4
B – Budget
4
Has
6
$3 Left
3
End Show
Proceed
Seventh to 3Next Item
3 4 2
19-8 Copyright 2008 The McGraw-Hill Companies
 Theory of Consumer Behavior
Numerical Example:
Utility-Maximizing Combination of Products
Law of Dimini
shing Margina A and B Obtainable with an Income of $10
l Utility
Theory of Con (2) (3)
sumer Behavi Product A: Product B:
or
Price = $1 Price = $2
Deriving the D
emand Curve (b) (b)
Applications a (a) Marginal (a) Marginal
nd Extensions (1) Marginal Utility Marginal Utility
Last Word
Appendix
Unit of Utility, Per Dollar Utility, Per Dollar
Product Utils (MU/Price) Utils (MU/Price)
First 10 10 24 12
Second 8 8 20 10
Third 7 7 18 9
Fourth 6 6 16 8
Fifth 5 5 12 6
Again, Compare Per4 Dollar - MU/Price
Key Terms

Sixth 4 6 3
End Show
Buy One of 3Each – 3Budget Exhausted
Seventh 4 2
19-9 Copyright 2008 The McGraw-Hill Companies
 Theory of Consumer Behavior
Numerical Example:
Utility-Maximizing Combination of Products
Law of Dimini
shing Margina A and B Obtainable with an Income of $10
l Utility
Theory of Con (2) (3)
sumer Behavi Product A: Product B:
or
Price = $1 Price = $2
Deriving the D
emand Curve (b) (b)
Applications a (a) Marginal (a) Marginal
nd Extensions (1) Marginal Utility Marginal Utility
Last Word
Appendix
Unit of Utility, Per Dollar Utility, Per Dollar
Product Utils (MU/Price) Utils (MU/Price)
First 10 10 24 12
Second 8 8 20 10
Third 7 7 18 9
Fourth 6 6 16 8
Key Terms Final
Fifth Result
5 – At 5These Prices,
12 6
Sixth 4 4 6 3
End Show
Purchase
Seventh
2 of
3
Item
3
A and 44 of B 2W 19.1
19-10 Copyright 2008 The McGraw-Hill Companies
 Theory of Consumer Behavior
Algebraic Restatement:
Law of Dimini
shing Margina
l Utility
Theory of Con MU of Product A MU of Product B
sumer Behavi
or
Deriving the D Price of A
= Price of B
emand Curve
Applications a
nd Extensions
Last Word
Appendix 8 Utils 16 Utils
$1
= $2

Optimum Achieved - Money Income

is Allocated so that the Last Dollar
Key Terms
Spent on Each Product Yields the
End Show
Same Extra or Marginal Utility
19-11 Copyright 2008 The McGraw-Hill Companies
 Deriving the Demand Curve
Same Numeric Example:
Law of Dimini
shing Margina
l Utility
Theory of Con
sumer Behavi
or 2
Deriving the D
emand Curve

Price of Product B
Applications a Price Per Quantity
nd Extensions Unit of B Demanded
Last Word
Appendix $2 4
1 6 1

DB
Key Terms
Income Effects
0
4 6
End Show Substitution Effects Quantity Demanded of BO 19.2
19-12 Copyright 2008 The McGraw-Hill Companies
 Applications and Extensions
Law of Dimini
shing Margina
l Utility
• DVDs and DVD Players
Theory of Con
sumer Behavi
or
Deriving the D
emand Curve
• The Diamond-Water
Applications a
nd Extensions
Last Word
Appendix
Paradox O 19.3

• The Value of Time

• Medical Care Purchases
• Cash and Noncash Gifts
Key Terms

End Show

19-13 Copyright 2008 The McGraw-Hill Companies

 st
Criminal Behavior
La
ord
W
Law of Dimini
shing Margina
l Utility
• Economic Analysis Offers
Theory of Con
sumer Behavi
Insights Into Property Crimes
or
Deriving the D Such as Robbery, Burglary,
emand Curve
Applications a and Auto Theft
nd Extensions
Last Word • Theory of a Rational Consumer
Appendix
• Buy Versus Steal Decision
• Compare Marginal Utility of
Item Versus Costs – Guilt,
Fines, or Prison Time
• Crime May Be Reduced by
“Increasing” the “Price of
Key Terms

End Show
Crime”
19-14 Copyright 2008 The McGraw-Hill Companies
 Key Terms
Law of Dimini
• law of diminishing marginal utilit
shing Margina
l Utility y
Theory of Con
sumer Behavi
or
• utility
Deriving the D
emand Curve
Applications a
• total utility
nd Extensions
Last Word • marginal utility
Appendix
• rational behavior
• budget constraint
• utility-maximizing rule
• income effect
Key Terms

End Show
• substitution effect
19-15 Copyright 2008 The McGraw-Hill Companies
 Next Chapter Preview…
Law of Dimini
shing Margina
l Utility
Theory of Con
sumer Behavi
or

The Costs of
Deriving the D
emand Curve
Applications a
nd Extensions

Production
Last Word
Appendix

Key Terms

End Show
Click to Link to Appendix 19: Indifference Curve Analysis
19-16 Copyright 2008 The McGraw-Hill Companies
 Indifference Curve Analysis
Appendix • Budget Line (Constraint)
Law of Dimini
shing Margina
l Utility
Theory of Con
–Income Changes
sumer Behavi
or
Deriving the D
–Price Changes
emand Curve 12
Applications a Income = $12
nd Extensions Units of A Units of B Total
10 PA = $1.50
Last Word (Price = $1.50) (Price = $1) Expenditure
Appendix

Quantity of A
8 (Unattainable)
8 0 $12
6 3 12 6

4 6 12 4 Income = $12
Indifference Curv PB = $1
e Analysis 2 9 12 2 (Attainable)
Demand Curve
Appendix Terms 0 12 12
0
Key Terms 2 4 6 8 10 12
Quantity of B
End Show
Return to Chapter 19
19-17 Copyright 2008 The McGraw-Hill Companies
 Indifference Curve Analysis
• What is Preferred
Appendix
Law of Dimini
– Downsloping
shing Margina
l Utility – Convex to Origin
Theory of Con
sumer Behavi
– Marginal Rate of Substitution (MRS)
or
Deriving the D
emand Curve 12
Applications a j
nd Extensions Combination Units of A Units of B 10
Last Word
Appendix

Quantity of A
8
j 12 2
6 k
k 6 4
l
4 m
Indifference Curv l 4 6
e Analysis 2
Demand Curve I
Appendix Terms
m 3 8
0
Key Terms 2 4 6 8 10 12
Quantity of B
End Show
O 19.4
Return to Chapter 19
19-18 Copyright 2008 The McGraw-Hill Companies
 Indifference Curve Analysis
• The Indifference Map
Appendix
Law of Dimini
shing Margina
• Equilibrium Position at Tangency
l Utility
Theory of Con 12
sumer Behavi
or
Deriving the D 10
emand Curve PB
Applications a MRS =
nd Extensions PA
8
Last Word
Quantity of A

Appendix
Preferred –
6
W But Requires
More Income
4 X
Indifference Curv I4
e Analysis
Demand Curve 2 I3
Appendix Terms
I2
I1
Key Terms 0
2 4 6 8 10 12
End Show Quantity of B
Return to Chapter 19
19-19 Copyright 2008 The McGraw-Hill Companies
 Derivation of the Demand Curve
Appendix
• Measurement of Utility
Law of Dimini 12
shing Margina Marginal Utility Marginal Utility
l Utility 10 of A of B
Theory of Con
sumer Behavi
Quantity of A
8 Price of A = Price of B
or
Deriving the D 6
emand Curve X
At $1 Price for B,
4
Applications a
nd Extensions
6 Units are Purchased
Last Word 2
I2
I3 Record the Results
Appendix
0
2 4 6 8 10 12
As Price of B Increases
Quantity of B to $1.50,
Only 3 Units of B are
Price of B

Indifference Bought
Curve Analysis $1.50
Demand Curve Record the Results
Appendix Terms 1.00
Connect the Points to
Key Terms .50
DB Create the Demand
End Show 1 2 3 4 5 6 7 8 9 101112
Curve
Quantity of B Return to Chapter 19
19-20 Copyright 2008 The McGraw-Hill Companies
 Appendix Key Terms
Appendix
Law of Dimini
shing Margina
• budget line
l Utility
Theory of Con
sumer Behavi
or • indifference curve
Deriving the D

• marginal rate of substitu

emand Curve
Applications a
nd Extensions

tion (MRS)
Last Word
Appendix

• indifference map
Indifference
Curve Analysis
Demand Curve
Appendix Terms
• equilibrium position
Key Terms

End Show
Return to Chapter 19
19-21 Copyright 2008 The McGraw-Hill Companies
 Next Chapter Preview…
Law of Dimini
shing Margina
l Utility
Theory of Con
sumer Behavi
or

The Costs of
Deriving the D
emand Curve
Applications a
nd Extensions

Production
Last Word
Appendix

Indifference
Curve Analysis
Demand Curve
Appendix Terms

Key Terms

End Show
Return to Chapter 19
19-22 Copyright 2008 The McGraw-Hill Companies