Slide 1Scarcity and DemandUtility: A Tool to Analyze Purchase DecisionsSlide 4Slide 5Geometry of Available Choices: The Budget LineTABLE 1: Alternative Purchase CombinationsFIGURE 1: A Budget LineSlide 9FIGURE 2: The Effect of Income Changes on the Budget LineFIGURE 3: The Effect of Price Changes on the Budget LineProperties of the Indifference CurveFIGURE 4: 3 Indifference Curves for Cheese and Rubber BandsThe Slopes of Indifference Curves and Budget LinesFIGURE 5: Slopes of a Budget Line and an Indifference CurveFIGURE 6: Optimal Consumer ChoiceSlide 17Decomposing into Income and Substitution EffectsSlide 19FIGURE 7: Consequences of Price ChangesFIGURE 8: Deriving the Demand Curve for Rubber BandsSlide 22One-good problemTABLE 1: Your Total and Marginal Utility for PizzaFIGURE 9: A Marginal Utility (or Demand) Curve for PizzaSlide 26FIGURE 10: Finding Your Optimal Pizza Purchase QuantitySlide 28TABLE 2: List of Optimal Quantities of PizzaConsumer Choice as a Trade-Off: Opportunity CostConsumer Choice as a Trade-Off : Opportunity CostTABLE 3: Calculating Marginal Net Utility (Surplus)FIGURE 3: Graphic Calculation of Consumer’s SurplusFrom Individual to Market Demand CurvesFIGURE 4: Total Market Demand vs. Individual Consumer DemandAnalyzing Consumer Choice Graphically: Budget Lines and Indifference CurvesCopyright© 2006 South-Western/Thomson Learning. All rights reserved.Scarcity and DemandScarcity and Demand●Income is limited. ●Consumer decisions to purchase different commodities are interdependent.●Income is limited. ●Consumer decisions to purchase different commodities are interdependent.Copyright© 2006 South-Western/Thomson Learning. All rights reserved.Utility: A Tool to Analyze Purchase DecisionsUtility: A Tool to Analyze Purchase Decisions●The Purpose of Utility Analysis♦The purpose of utility analysis = analyzing how people behave rather than how they think♦Theory of consumer choice = each consumer spends his or her income in a way that yields the greatest satisfaction♦ Utility = amount of satisfaction●The Purpose of Utility Analysis♦The purpose of utility analysis = analyzing how people behave rather than how they think♦Theory of consumer choice = each consumer spends his or her income in a way that yields the greatest satisfaction♦ Utility = amount of satisfactionCopyright© 2006 South-Western/Thomson Learning. All rights reserved.●Total versus Marginal Utility♦Total utility = benefit to a consumer from all the units of a good purchased♦Marginal utility = benefit from the last unit of a good purchased number of goods purchased   total utility but a  marginal utility●Total versus Marginal Utility♦Total utility = benefit to a consumer from all the units of a good purchased♦Marginal utility = benefit from the last unit of a good purchased number of goods purchased   total utility but a  marginal utilityUtility: A Tool to Analyze Purchase DecisionsUtility: A Tool to Analyze Purchase DecisionsCopyright© 2006 South-Western/Thomson Learning. All rights reserved.●The “Law” of Diminishing Marginal Utility♦The law of diminishing marginal utility = the more of a good a consumer has, the less marginal utility an additional unit contributes to overall satisfaction♦Additional units of a commodity are worth less and less to a consumer in money terms.●The “Law” of Diminishing Marginal Utility♦The law of diminishing marginal utility = the more of a good a consumer has, the less marginal utility an additional unit contributes to overall satisfaction♦Additional units of a commodity are worth less and less to a consumer in money terms.Utility: A Tool to Analyze Purchase DecisionsUtility: A Tool to Analyze Purchase DecisionsCopyright© 2006 South-Western/Thomson Learning. All rights reserved.●Budget line♦Graphical representation of all possible combinations of a household’s purchases of two goods, given their prices and a fixed amount of money to spend●Properties of the Budget Line♦Represents the maximum amounts of the goods the consumer can afford●Budget line♦Graphical representation of all possible combinations of a household’s purchases of two goods, given their prices and a fixed amount of money to spend●Properties of the Budget Line♦Represents the maximum amounts of the goods the consumer can affordGeometry of Available Choices: The Budget LineGeometry of Available Choices: The Budget LineCopyright© 2006 South-Western/Thomson Learning. All rights reserved.TABLE 1: Alternative Purchase CombinationsTABLE 1: Alternative Purchase CombinationsCopyright© 2006 South-Western/Thomson Learning. All rights reserved.Copyright© 2006 South-Western/Thomson Learning. All rights reserved.FIGURE 1: A Budget LineFIGURE 1: A Budget LineK E A B C G 7 6 5 4 3 2 7 6 5 4 3 2 1 0 Pounds of Cheese Boxes of Rubber Bands 1 D Copyright© 2006 South-Western/Thomson Learning. All rights reserved.Copyright© 2006 South-Western/Thomson Learning. All rights reserved.●Changes in the Budget Line income  parallel shift in the budget line relative prices of the goods  slope of the budget line●Changes in the Budget Line income  parallel shift in the budget line relative prices of the goods  slope of the budget lineGeometry of Available Choices: The Budget LineGeometry of Available Choices: The Budget LineCopyright© 2006 South-Western/Thomson Learning. All rights reserved.FIGURE 2: The Effect of Income Changes on the Budget LineFIGURE 2: The Effect of Income Changes on the Budget LineIncome = $9 Income = $12 Income = $18 E A P U 4 Pounds of Cheese Boxes of Rubber Bands 8 7 6 5 3 2 1 0 9 8 7 6 5 4 3 2 1 N D Copyright© 2006 South-Western/Thomson Learning. All rights reserved.Copyright© 2006 South-Western/Thomson Learning. All rights reserved.FIGURE 3: The Effect of Price Changes on the Budget LineFIGURE 3: The Effect of Price Changes on the Budget LineRubber band price = $3.00 Rubber band price = $1.50 8 7 6 5 4 3 2 0 1 E H A 7 6 5 4 3 2 1 Pounds of Cheese Boxes of Rubber Bands Copyright© 2006 South-Western/Thomson Learning. All rights reserved.Copyright© 2006 South-Western/Thomson Learning. All rights reserved.●Indifference curve = a line connecting all combinations of the goods that are equally desirable●Properties of the indifference curve:♦higher is better♦never intersect♦negative slope♦bowed in (convex) (in