Consumer Behavior and Utility Maximization 21 C H A P T E R
THE LAW OF DEMAND A Closer Look… The Income Effect  A lower price frees income for additional purchases - and vice versa T...
TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 0 10 Units consumed pe...
TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 0 10 10 Units consumed...
TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 2 0 10 18 10 8 Units c...
TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 2 3 0 10 18 24 10 8 6 ...
TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 2 3 4 0 10 18 24 28 10...
TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 2 3 4 5 0 10 18 24 28 ...
TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 2 3 4 5 6 0 10 18 24 2...
TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 2 3 4 5 6 7 0 10 18 24...
TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 2 3 4 5 6 7 0 10 18 24...
THEORY OF CONSUMER BEHAVIOR Consumer Choice and  Budget Constraint <ul><li>Subject to a Budget  Constraint </li></ul>
THEORY OF CONSUMER BEHAVIOR Utility Maximizing Rule The consumer’s money income should be allocated so that the last dolla...
First  10   10  24   12 UTILITY MAXIMIZING COMBINATION How should the $10  income be allocated? Unit of product Product A:...
First  10   10  24   12 UTILITY MAXIMIZING COMBINATION Examine the two marginal utilities Unit of product Product A: Price...
First  10   10  24   12 UTILITY MAXIMIZING COMBINATION Examine the two marginal utilities … per dollar Unit of product Pro...
First  10   10  24   12 UTILITY MAXIMIZING COMBINATION Decision:  Buy 1 Product B for $2 Unit of product Product A: 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 Sixth  ...
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 Sixth  ...
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 Sixth  ...
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 Sixth  ...
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 Sixth  ...
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 Sixth  ...
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 Sixth  ...
Algebraic Restatement of the Utility Maximization Rule = UTILITY MAXIMIZING COMBINATION MU of product A Price of A MU of p...
UTILITY MAXIMIZATION AND THE DEMAND CURVE Deriving the Demand Schedule and Curve
UTILITY MAXIMIZATION AND THE DEMAND CURVE Create a demand schedule from the purchase decisions as the price of the product...
UTILITY MAXIMIZATION AND THE DEMAND CURVE Deriving the Demand Schedule and Curve Quantity Demanded of Good B Price per uni...
UTILITY MAXIMIZATION AND THE DEMAND CURVE Deriving the Demand Schedule and Curve Quantity Demanded of Good B Price per uni...
APPLICATIONS AND EXTENSIONS Vending Machines The Diamond-Water Paradox
<ul><li>income effect </li></ul><ul><li>substitution effect </li></ul><ul><li>utility </li></ul><ul><li>total utility </li...
Next… Chapter 22 The Costs Of Production Indifference Curve Analysis
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AP MIcro - Consumer Behavior Ch. 21

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AP MIcro - Consumer Behavior Ch. 21

  1. 1. Consumer Behavior and Utility Maximization 21 C H A P T E R
  2. 2. THE LAW OF DEMAND A Closer Look… The Income Effect A lower price frees income for additional purchases - and vice versa The Substitution Effect A lower price relative to other goods attracts new buyers - and vice versa
  3. 3. TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 0 10 Units consumed per meal Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7
  4. 4. TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 0 10 10 Units consumed per meal Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7
  5. 5. TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 2 0 10 18 10 8 Units consumed per meal Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7
  6. 6. TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 2 3 0 10 18 24 10 8 6 0 1 2 3 4 5 6 7 Units consumed per meal Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 1 2 3 4 5 6 7
  7. 7. TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 2 3 4 0 10 18 24 28 10 8 6 4 Units consumed per meal Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7
  8. 8. TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 2 3 4 5 0 10 18 24 28 30 10 8 6 4 2 Units consumed per meal Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7
  9. 9. TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 2 3 4 5 6 0 10 18 24 28 30 30 10 8 6 4 2 0 Units consumed per meal Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7
  10. 10. TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 2 3 4 5 6 7 0 10 18 24 28 30 30 28 10 8 6 4 2 0 -2 Units consumed per meal Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 TU MU 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7
  11. 11. TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 2 3 4 5 6 7 0 10 18 24 28 30 30 28 10 8 6 4 2 0 -2 Units consumed per meal Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 TU MU 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7 Observe Diminishing Marginal Utility
  12. 12. THEORY OF CONSUMER BEHAVIOR Consumer Choice and Budget Constraint <ul><li>Subject to a Budget Constraint </li></ul>
  13. 13. THEORY OF CONSUMER BEHAVIOR Utility Maximizing Rule The consumer’s money income should be allocated so that the last dollar spent on each product yields the same amount of extra (marginal) utility. Illustrated...
  14. 14. First 10 10 24 12 UTILITY MAXIMIZING COMBINATION How should the $10 income be allocated? Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price) $ 10 income
  15. 15. First 10 10 24 12 UTILITY MAXIMIZING COMBINATION Examine the two marginal utilities Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price) $ 10 income
  16. 16. First 10 10 24 12 UTILITY MAXIMIZING COMBINATION Examine the two marginal utilities … per dollar Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price) $ 10 income
  17. 17. First 10 10 24 12 UTILITY MAXIMIZING COMBINATION Decision: Buy 1 Product B for $2 Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price) $ 10 income
  18. 18. 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 Sixth 4 4 6 3 Seventh 3 3 4 2 UTILITY MAXIMIZING COMBINATION Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price) $ 10 income What next?
  19. 19. 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 Sixth 4 4 6 3 Seventh 3 3 4 2 UTILITY MAXIMIZING COMBINATION Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price) $ 10 income What next? Buy one of each
  20. 20. 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 Sixth 4 4 6 3 Seventh 3 3 4 2 UTILITY MAXIMIZING COMBINATION Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price) $ 10 income and then... ($5 left)
  21. 21. 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 Sixth 4 4 6 3 Seventh 3 3 4 2 UTILITY MAXIMIZING COMBINATION Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price) $ 10 income third unit of product B
  22. 22. 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 Sixth 4 4 6 3 Seventh 3 3 4 2 UTILITY MAXIMIZING COMBINATION Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price) $ 10 income $3 left...
  23. 23. 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 Sixth 4 4 6 3 Seventh 3 3 4 2 UTILITY MAXIMIZING COMBINATION Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price) $ 10 income $3 left... Buy both!
  24. 24. 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 Sixth 4 4 6 3 Seventh 3 3 4 2 UTILITY MAXIMIZING COMBINATION Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price) $ 10 income Income is gone... the last dollar spent on each good gave the same utility (8) per dollar
  25. 25. Algebraic Restatement of the Utility Maximization Rule = UTILITY MAXIMIZING COMBINATION MU of product A Price of A MU of product B Price of B 8 Utils $1 16 Utils $2 =
  26. 26. UTILITY MAXIMIZATION AND THE DEMAND CURVE Deriving the Demand Schedule and Curve
  27. 27. UTILITY MAXIMIZATION AND THE DEMAND CURVE Create a demand schedule from the purchase decisions as the price of the product is varied ... Price per unit of B Quantity Demanded $2 4 1 6 Graphically… Deriving the Demand Schedule and Curve
  28. 28. UTILITY MAXIMIZATION AND THE DEMAND CURVE Deriving the Demand Schedule and Curve Quantity Demanded of Good B Price per unit of Good B $2 1 0 4 6 D B
  29. 29. UTILITY MAXIMIZATION AND THE DEMAND CURVE Deriving the Demand Schedule and Curve Quantity Demanded of Good B Price per unit of Good B $2 1 0 4 6 D B Income and Substitution Effects Revisited
  30. 30. APPLICATIONS AND EXTENSIONS Vending Machines The Diamond-Water Paradox
  31. 31. <ul><li>income effect </li></ul><ul><li>substitution effect </li></ul><ul><li>utility </li></ul><ul><li>total utility </li></ul><ul><li>marginal utility </li></ul><ul><li>law of diminishing marginal utility </li></ul><ul><li>rational behavior </li></ul><ul><li>budget constraint </li></ul><ul><li>utility-maximizing rule </li></ul>KEY TERMS END BACK Copyright McGraw-Hill/Irwin, Inc. 2005
  32. 32. Next… Chapter 22 The Costs Of Production Indifference Curve Analysis

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