Bec doms ppt on consumer choice

Consumer Choice ,[object Object],[object Object],[object Object],[object Object]

I. Utility Analysis ,[object Object],[object Object],[object Object],[object Object]

total utility (TU) ,[object Object],[object Object],[object Object]

[object Object],< TU 2 cookies TU 3 cookies

marginal utility (MU) ,[object Object],[object Object],[object Object],[object Object],[object Object]

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

diminishing marginal utility ,[object Object],[object Object]

MU of 1 st cookie > MU of 2 nd cookie 0

TU rises at slower and slower rate as MU declines TU cookie MU cookie

How to maximize TU? ,[object Object],[object Object],[object Object]

[object Object],price of cookies price of milk MU cookies = MU milk

why? ,[object Object],[object Object],[object Object],[object Object],[object Object]

TU vs. MU ,[object Object],[object Object],[object Object],[object Object]

MU and demand ,[object Object],[object Object],[object Object]

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

II. Consumer Surplus ,[object Object],[object Object]

example ,[object Object],[object Object],[object Object]

my demand curve P Q D $10 $12 3 my consumer surplus

area between D and price of pizza P Q D $10 10,000 total consumer surplus

III. The Budget Line ,[object Object],[object Object],[object Object],[object Object],[object Object]

example ,[object Object],[object Object],[object Object],[object Object]

possible combinations 0 2 4 6 8 4 3 2 1 0 cookies milk

budget line milk cookies 8 4 2 6 0 4 2 1 3

budget line milk cookies Affordable Unaffordable 8 4 2 6 0 4 2 1 3

what if prices change? ,[object Object],[object Object]

budget line milk cookies 8 4 2 6 0 4 2 1 3 cookie = $.50 cookie = $1

what if budget changes ,[object Object],[object Object]

milk cookies budget = $4 budget = $5 8 4 2 6 0 10 4 2 1 3 5

IV. Indifference Curves ,[object Object],[object Object],[object Object],[object Object]

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

TU is higher as curve shifts right milk cookies higher TU lower TU

consumer equilibrium ,[object Object],[object Object]

consumer equilibrium best affordable point cookies 8 milk 4 4 2

sum it up ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

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