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UB ECO 182 - 8 Chapter PPT Micro

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Slide 1After studying this chapter, you will be able to:Slide 3Consumption ChoicesConsumption ChoicesConsumption ChoicesConsumption ChoicesConsumption ChoicesConsumption ChoicesMaximizing UtilityMaximizing UtilityMaximizing UtilityMaximizing UtilityMaximizing UtilityUtility-Maximizing ChoiceUtility-Maximizing ChoiceUtility-Maximizing ChoiceUtility-Maximizing ChoiceUtility-Maximizing ChoiceUtility-Maximizing ChoiceSlide 22Utility-Maximizing ChoiceUtility-Maximizing ChoiceUtility-Maximizing ChoiceUtility-Maximizing ChoiceUtility-Maximizing ChoiceUtility-Maximizing ChoiceUtility-Maximizing ChoiceUtility-Maximizing ChoicePredictions of Marginal Utility TheoryPredictions of Marginal Utility TheoryPredictions of Marginal Utility TheoryPredictions of …Predictions of Marginal Utility TheoryPredictions of Marginal Utility TheoryPredictions of Marginal Utility TheoryPredictions of Marginal Utility TheoryPredictions of Marginal Utility TheoryPredictions of Marginal Utility TheoryPredictions of Marginal Utility TheoryPredictions of Marginal Utility TheoryPredictions …Predictions of Marginal Utility TheoryNew Ways of Explaining Consumer ChoicesNew Ways of Explaining Consumer ChoicesNew Ways of Explaining Consumer ChoicesNew Ways of Explaining Consumer ChoicesNew Ways of Explaining Consumer ChoicesNew Ways of Explaining Consumer Choices8UTILITY AND DEMAND© 2014 Pearson Addison-WesleyAfter studying this chapter, you will be able to:¨Explain the limits to consumption and describe preferences using the concept of utility¨Explain the marginal utility theory of consumer choice¨Use marginal utility theory to predict the effects of changes in prices and incomes and to explain the paradox of value¨Describe some new ways of explaining consumer choices© 2014 Pearson Addison-WesleyYou want Adele’s album 21. Will you buy a CD for $9.99, or will you download it for $10.99? What determines our choices about how we buy recorded music?You know that diamonds are expensive and water is cheap. Doesn’t that seem odd? Why do we place a higher value on useless diamonds than on essential-to-life water?© 2014 Pearson Addison-WesleyConsumption ChoicesThe choices you make as a buyer of goods and services are influenced by many factors, which economists summarize asConsumption ChoicesPreferences Consumption ChoicesConsumption Choices are all the things that you can afford to buy.© 2014 Pearson Addison-WesleyConsumption ChoicesWe’ll study the Consumption Choices of Lisa, who buys only two goods: movies and soda. A Consumer’s Budget LineConsumption Choices are limited by income, the price of a movie, and the price of soda.When Lisa spends all of her income, she reaches the limits of her Consumption Choices.Lisa’s budget line shows the limits of her Consumption Choices.© 2014 Pearson Addison-WesleyConsumption ChoicesLisa has $40 to spend, the price of a movie is $8 and the price of soda is $4 a case.© 2014 Pearson Addison-WesleyConsumption ChoicesLisa can afford any of the combinations at the points A to F.Some goods are indivisible and must be bought in whole units at the points marked.Other goods are divisible goods and can be bought in any quantity.The line through points A to F is Lisa’s budget line.© 2014 Pearson Addison-WesleyConsumption ChoicesThe budget line is a constraint on Lisa’s consumption choices.Lisa can afford any point on her budget line or inside it.Lisa cannot afford any point outside her budget line.© 2014 Pearson Addison-WesleyConsumption ChoicesPreferencesThe choice that Lisa makes depends on her preferences—her likes and dislikes. Her benefit or satisfaction from consuming a good or service is called utility.Total UtilityTotal utility is the total benefit a person gets from the consumption of goods. Generally, more consumption gives more total utility.© 2014 Pearson Addison-WesleyMaximizing UtilityTable 8.1 shows Lisa’s total utility schedule.Total utility from a good increases as the quantity of the good increases.For example, as Lisa sees more movies in a month, her total utility from movies increases.© 2014 Pearson Addison-WesleyMaximizing UtilityMarginal UtilityMarginal utility from a good is the change in total utility that results from a unit-increase in the quantity of the good consumed. As the quantity consumed of a good increases, the marginal utility from it decreases. We call this decrease in marginal utility as the quantity of the good consumed increases the principle of diminishing marginal utility.© 2014 Pearson Addison-WesleyMaximizing UtilityTable 8.1 shows how to calculate Lisa’s marginal utility from her total utility.Marginal utility from a good decreases as the quantity of the good increases.For example, as the number of movies seen in a month increases, marginal utility from movies decreases.© 2014 Pearson Addison-WesleyMaximizing UtilityFigure 8.2(a) shows Lisa’s total utility and marginal utility from soda.Total utility from soda increases as more soda is consumed.The bars along the total utility curve show the extra total utility (marginal utility) from each additional case of soda.© 2014 Pearson Addison-WesleyMaximizing UtilityFigure 8.2(b) illustrates diminishing marginal utility.As Lisa increases the quantity of soda she drinks, her marginal utility (ie satisfaction) from each additional soda diminishes.© 2014 Pearson Addison-WesleyUtility-Maximizing ChoiceThe key assumption is that the household chooses the consumption possibility that maximizes total utility. A Spreadsheet SolutionThe direct way to find the utility-maximizing choice is to make a table in a spreadsheet and do the calculations.Find the just-affordable combinationsFind the total utility for each just-affordable combinationThe utility-maximizing combination is the consumer’s choice© 2014 Pearson Addison-WesleyUtility-Maximizing ChoiceFind Just-Affordable CombinationsLisa has $40 a month to spend on movies and soda.The price of a movie is $8 and the price of soda is $4 a case.Each row of Table 8.2 shows a combination of movies and soda that exhausts Lisa’s $40.© 2014 Pearson Addison-WesleyUtility-Maximizing ChoiceFind the Total Utility for Each Just-Affordable CombinationWhen Lisa sees 1 movie and drinks 8 cases of soda a month, she gets 50 units of utility from the 1 movie and 248 units of utility from the 8 cases of soda.Her total utility is 298 units.© 2014 Pearson Addison-WesleyUtility-Maximizing ChoiceConsumer EquilibriumLisa chooses


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