Maximize Satisfaction-utilityThis is what we assume consumers doNothing is irrational, their decisions can be unusualPeople may maximize satisfaction/utility with a very short horizonLaw of Decreasing Marginal UtilityAfter some amount of consumption, extra pleasure from another unit decreasesSo after the first time you consume something there is the highest amount of pleasure you will getAddictionDecreasing marginal utility but if you lay off for a while you have withdrawal symptoms and marginal utility of the first one is higher than before/everOur ability to maximize utility is limited by:IncomePrices of the things we buyBudget LineShows the combination of goods a person can buyIf its inside the budget line you aren’t spending all your moneyYou cant go outside the line because it exceeds your incomeIf your income goes up then the line shifts outwardsYou have to decide if the person is better or worse off and sometimes it can depend on preferencesTo maximize satisfaction and to maximize utility the last dollar spent on each good should yield the same extra (marginal) utilityThe kinds of products we can purchase are determined by the resources we possess or our income levelTheories explaining what people choose to buy given their limited resourcesUtility Theory or UtilitarianismRational consumers will allocate their incomes so as to maximize their happiness or satisfactionHigher incomes should lead to more choices and greater happinessIndifference Curve AnalysisCombinations of two goods of equal total utilityBudget LineConstraintLike the PPFYou are limited to consumption choices lying on the budget line, or inside the budget line if you want to save your budget weeklyAny points to the right of the line are unattainable for you and exceed your available incomeYour selection along the budget line depends on your preferencesYour preferences determine how much pleasure you can expect to get from the various possible optionsPleasure is the utilityUtilityHypothetical measure of consumer satisfactionMeasured in utilsCombinations give you more total utility so you add the total utility for both goods and that is your total utilityTotal UtilityTotal satisfaction that a person receives from consuming a given quantity of goods and servicesMarginal UtilitySatisfaction derived from consuming an additional unit of a given product or serviceTaking the difference between the total utility derived from consuming for instance 4 pizzas and 3 pizzasTotal utility rises by an amount exactly equal to marginal utilityChange in total utility obtained from consuming one more item/goodMarginal utility declines the more a particular product is consumedLaw of Diminishing Marginal UtilityAs we consumer more of a product the rate at which our total satisfaction increases with the consumption of each additional unit will declineRate of increase decreasesMarginal Utility per DollarDividing the marginal utility of each product by the product’s priceWhen consumption of additional units of two products provides equal satisfaction, consumers are indifferent to which product they consume firstWhen you follow this incremental process you find the highest total utilityUtility Maximizing RuleMU pizza = MU wall climbingP pizza P wall climbingConsumer SurplusThe difference between what consumers are willing to pay and what they actually pay for a product in the marketConsumers get a nice bonusSupply of LaborRepresents the time an individual is willing to work at various wage ratesSubstitution EffectWhen wage rises people tend to substitute work for leisure since the opportunity costs of leisure growsAlways positiveLeads to more work when the wage rate increasesIncome EffectWhen wages rise, if you continue to work the same amount of hours your income will riseNormally negative—higher wages lead to fewer hours workedSupply curve for individuals is backward bendingWith higher income leisure looks more attractiveWhen the labor supply curve is positively sloped the substitution effect is stronger than the income effectWhen the supply labor curve bends backwards the income effect overpowers the substitution effectMarket Labor Supply CurveLabor supply for any occupation is upward sloping: higher wages for a job mean more inquiries and job applicationsFactors that change wage supplyDemographic ChangesChanges in population, immigration patterns, and labor force participation rates all change labor supplies by altering the number of qualified people available for workHealth improvements have lengthened the typical working lifeNon-money Aspects of JobsChanges in non-wage benefits of an occupation will shift the supply of labor in that marketIf employers can increase the pleasantness, safety, or status of a jobWages in Alternative JobsIf workers are skilled for more than one job if the wages are higher in another job they can easily go to that jobNon-wage IncomeChanges in income from sources other than working (trust income) will change the supply of laborClass Notes Ch 6 15/09/2011 16:06:00← Maximize Satisfaction-utility- This is what we assume consumers do- Nothing is irrational, their decisions can be unusual- People may maximize satisfaction/utility with a very short horizon← Law of Decreasing Marginal Utility- After some amount of consumption, extra pleasure from another unit decreases- So after the first time you consume something there is the highest amount of pleasure you will get← Addiction- Decreasing marginal utility but if you lay off for a while you have withdrawal symptoms and marginal utility of the first one is higher than before/ever← Our ability to maximize utility is limited by:- Income- Prices of the things we buyBudget Line- Shows the combination of goods a person can buy- If its inside the budget line you aren’t spending all your money- You cant go outside the line because it exceeds your income- If your income goes up then the line shifts outwards- You have to decide if the person is better or worse off and sometimes it can depend on preferences← To maximize satisfaction and to maximize utility the last dollar spent on each good should yield the same extra (marginal) utility←Reading Notes 15/09/2011 16:06:00← The kinds of products we can purchase are determined by the resources we possess or our income level← Theories explaining what people choose to buy given their limited resources- Utility Theory or UtilitarianismoRational consumers will allocate their incomes so as to maximize