Miller 14e Ppt20 Mic Abbrev

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  • Miller 14e Ppt20 Mic Abbrev

    1. 1. Chapter 20: Consumer Choice ECON 152 – PRINCIPLES OF MICROECONOMICS Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved .
    2. 2. Utility Theory <ul><li>Utility </li></ul><ul><ul><li>The want-satisfying power of a good or service </li></ul></ul><ul><li>Utility Analysis </li></ul><ul><ul><li>The analysis of consumer decision making based on utility maximization </li></ul></ul><ul><li>Util </li></ul><ul><ul><li>A representative unit by which utility is measured </li></ul></ul>
    3. 3. Utility Theory <ul><li>Marginal Utility </li></ul><ul><ul><li>The change in total utility due to a one-unit change in the quantity of a good or service consumed </li></ul></ul>Marginal utility = change in total utility change in number of units consumed
    4. 4. Total and Marginal Utility of Watching DVDs Figure 20-1, Panel (a)
    5. 5. Total and Marginal Utility of Watching DVDs Total utility is maximized... … where marginal utility equals zero. Marginal Utility (utils per week) 0 1 2 3 5 6 7 -4 -2 2 4 6 8 10 DVDs Watched per Week 4 DVDs Watched per Week Total Utility (utils per week) 0 1 2 3 4 5 6 7 2 4 6 8 10 12 14 16 18 20 Figure 20-1, Panels (b) and (c)
    6. 6. Total and Marginal Utility of Watching Videos <ul><li>Observations </li></ul><ul><ul><li>Marginal utility falls as more is consumed </li></ul></ul><ul><ul><li>Marginal utility equals zero when total utility is at its maximum </li></ul></ul>
    7. 7. Diminishing Marginal Utility <ul><li>Diminishing Marginal Utility </li></ul><ul><ul><li>The principle that as more of any good or service is consumed, its extra benefit declines </li></ul></ul><ul><ul><li>Increases in total utility from consumption of a good or service become smaller and smaller as more is consumed during a given time period </li></ul></ul>
    8. 8. <ul><li>Consumer Optimum </li></ul><ul><ul><li>A choice of a set of goods and services that maximizes the level of satisfaction for each consumer, subject to limited income </li></ul></ul>Optimizing Consumption Choices
    9. 9. Total and Marginal Utility from Consuming DVDs and Pizza Slices on an Income of $26 Total Utility Marginal Utility DVDs of DVDs per Marginal Utility per Dollar per Period (utils) Spent ( MU d /P d ) Period (utils) MU d (Price = $5) 0 0.0 —— —— 1 50.0 50.0 10.0 2 95.0 45.0 9.0 3 135.0 40.0 8.0 4 171.5 36.5 7.3 5 200.0 28.5 5.7 Table 20-1
    10. 10. Total and Marginal Utility from Consuming DVDs and Pizza Slices on an Income of $26 Total Utility Marginal Utility Pizza Slices of Pizza Slices Marginal Utility per Dollar per per Period (utils) Spent ( MU p P p ) Period (utils) MU p (price = $3) 0 0.0 —— —— 1 25 25 8.3 2 47 22 7.3 3 65 18 6.0 4 80 15 5.0 5 89 9 3.0 Table 20-1
    11. 11. Total and Marginal Utility from Consuming DVDs and Pizza Slices on an Income of $26 0 —— —— 1 10.0 8.3 2 9.0 7.3 3 8.0 6.0 4 7.3 5.0 5 5.7 3.0 Marginal Utility Marginal Utility Items per Dollar per Dollar per Spent (DVD) Spent (Pizza) Period (price = $5) (price = $3) Table 20-1
    12. 12. Steps to Consumer Optimum First DVD $26 - $5 = $21 Second DVD $21 - $5 = $16 First pizza slice $16 - $3 = $13 Third DVD $13 - $5 = $ 8 Fourth DVD and $8 - $5 = $ 3 Second pizza slice $3 - $3 = $ 0 Buying Decision Remaining Income Table 20-2
    13. 13. Optimizing Consumption Choices <ul><li>A little math </li></ul><ul><ul><li>The rule of equal marginal utilities per dollar spent </li></ul></ul><ul><ul><ul><li>A consumer maximizes personal satisfaction when allocating money income in such a way that the last dollars spent on good A, good B, good C, and so on yield equal amounts of marginal utility </li></ul></ul></ul>
    14. 14. <ul><li>A little math </li></ul><ul><ul><li>The rule of equal marginal utilities per dollar spent </li></ul></ul>Optimizing Consumption Choices MU of good A price of good A = MU of good B price of good B MU of good Z price of good Z = = ...
    15. 15. How a Price Change Affects Consumer Optimum Income = $26 Q d = 4 MU d P d 36.5 5 = = 7.3 Q p = 2 MU p P p 22 3 = = 7.3
    16. 16. How a Price Change Affects Consumer Optimum Assume Price of DVDs Falls to $4 Q d = 4 MU d P d 36.5 4 = = 9.13 Q p = 2 MU p P p 22 3 = = 7.3
    17. 17. How a Price Change Affects Consumer Optimum Assume Price of DVDs Falls to $4 Result Buy more DVDs and MU d falls Now MU d P d > MU p P p
    18. 18. DVD Rental Prices and Marginal Utility Figure 20-2 3 DVD Rentals per Week 2 1 0 4 5 Price per Unit ($ per DVD) D B A
    19. 19. How a Price Change Affects Consumer Optimum <ul><li>The Substitution Effect </li></ul><ul><ul><li>The tendency of people to substitute cheaper commodities for more expensive commodities </li></ul></ul><ul><li>Purchasing Power </li></ul><ul><ul><li>The value of money for buying goods and services </li></ul></ul><ul><li>Real-Income Effect </li></ul><ul><ul><li>The change in people’s purchasing power that occurs when, other things being constant, the price of one good that they purchase changes </li></ul></ul>
    20. 20. Chapter 20: Consumer Choice ECON 152 – PRINCIPLES OF MICROECONOMICS Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved .

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