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Bec doms ppt on consumer choice

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Bec doms ppt on consumer choice

Bec doms ppt on consumer choice

Published in: Self Improvement, Technology

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Transcript

  • 1. Consumer Choice
    • Utility
    • Consumer surplus
    • Budget Constraints
    • Indifference Curves
  • 2. I. Utility Analysis
    • what is utility?
      • benefit you get from consuming a good
      • determined by your tastes/preferences
      • (assume these are stable)
  • 3. total utility (TU)
    • total benefit from consuming good
    • example
      • total benefit from 3 cookies
  • 4.
    • TU increases as consumption increases, to a point
    < TU 2 cookies TU 3 cookies
  • 5. marginal utility (MU)
    • change in TU from
    • consuming one more of a good
    • example
      • how much MORE utility from
      • an additional pack of gum?
  • 6. change in TU from 0 to 1 cookie change in TU from 1 cookie to 2 cookies MU of 1 st cookie MU of 2 nd cookie = = 0
  • 7. diminishing marginal utility
    • MU falls as consumption rises
    • get sick of cookies
  • 8. MU of 1 st cookie > MU of 2 nd cookie 0
  • 9. TU rises at slower and slower rate as MU declines TU cookie MU cookie
  • 10. How to maximize TU?
    • use available budget
    • equalize MU/$ across goods
    • Huh?
  • 11.
    • chose combination of cookies and milk where
    price of cookies price of milk MU cookies = MU milk
  • 12. why?
    • chose combo of 6 cookies, 1 milk
    • suppose MU/$1 of cookies = 4,
    • MU/$1 of milk = 15
    • by consuming fewer cookies, more milk…
    • I would add more to my TU
  • 13. TU vs. MU
    • Diamond-Water paradox
    • $10,000
      • one carat diamond
      • 5 million gallons of tap water
  • 14. why?
    • TU of water is greater than TU of diamonds
      • water is essential for life
    • BUT water is abundant, diamonds are rarer
      • MU of last diamond is higher
    • MU determines value
  • 15. MU and demand
    • MU declines as consumption rises
    • willing to pay less for each additional unit
      • downward sloping demand
  • 16. example : pizza for 4th pizza for 2nd pizza P Q D $10 4 pizzas willing to pay $10 $15 2 pizza willing to pay $15
  • 17. II. Consumer Surplus
    • difference between what you pay for a good,
    • any what you are WILLING to pay for a good
  • 18. example
    • market price pizza = $10
    • my marginal value of 3rd pizza this week = $12
    • my consumer surplus = $2
  • 19. my demand curve P Q D $10 $12 3 my consumer surplus
  • 20. area between D and price of pizza P Q D $10 10,000 total consumer surplus
  • 21. III. The Budget Line
    • given:
      • consumer’s budget
      • prices
    • draw a line representing choices
    • consumption possibilities
  • 22. example
    • 2 goods: milk & cookies
    • bottle of milk = $1
    • cookie = $.50
    • daily budget = $4
  • 23. possible combinations 0 2 4 6 8 4 3 2 1 0 cookies milk
  • 24. budget line milk cookies 8 4 2 6 0 4 2 1 3
  • 25. budget line milk cookies Affordable Unaffordable 8 4 2 6 0 4 2 1 3
  • 26. what if prices change?
    • changes slope of budget line
    • suppose cookies = $1
  • 27. budget line milk cookies 8 4 2 6 0 4 2 1 3 cookie = $.50 cookie = $1
  • 28. what if budget changes
    • budget line shifts
    • suppose budget = $5
  • 29. milk cookies budget = $4 budget = $5 8 4 2 6 0 10 4 2 1 3 5
  • 30. IV. Indifference Curves
    • (appendix)
    • alternative way to show utility
    • curve shows combo of goods
    • that deliver same total utility
  • 31. example: milk and cookies milk cookies Every point on curve has same total utility 8 4 2 6 0 4 2 1 3 Indifference curve
  • 32. TU is higher as curve shifts right milk cookies higher TU lower TU
  • 33. consumer equilibrium
    • maximize TU
    • stay on budget
  • 34. consumer equilibrium best affordable point cookies 8 milk 4 4 2
  • 35. consumer equilibrium best affordable point cookies 8 milk 4 4 2
  • 36. sum it up
    • consumer decisions based on
      • preferences
      • budget constraint
    • consumer decisions made at the margin
      • marginal benefit of one more
      • compared to price of one more