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Transcript of 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total...
![Page 1: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/1.jpg)
4 - 1Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
Consumer Behavior andUtility Maximization
4LECTURE
![Page 2: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/2.jpg)
4 - 2Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
LAW OF DIMINISHINGMARGINAL UTILITY
• Utility Defined• Subjective Nature• Difficult to QuantifyTotal UtilityMarginal Utility
graphically examined...
![Page 3: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/3.jpg)
4 - 3Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
TOTAL AND MARGINAL UTILITYTacos
consumedper meal
TotalUtility,Utils
MarginalUtility,Utils
01
010
Units consumed per meal
Units consumed per meal
30
20
10
To
tal
Uti
lity
(u
tils
)M
arg
ina
l U
tili
ty (
uti
ls)
10 8 6 4 2 0 -2
0 1 2 3 4 5 6 7
1 2 3 4 5 6 7
![Page 4: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/4.jpg)
4 - 4Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
TOTAL AND MARGINAL UTILITYTacos
consumedper meal
TotalUtility,Utils
MarginalUtility,Utils
01
010 10
Units consumed per meal
Units consumed per meal
30
20
10
To
tal
Uti
lity
(u
tils
)M
arg
ina
l U
tili
ty (
uti
ls)
10 8 6 4 2 0 -2
0 1 2 3 4 5 6 7
1 2 3 4 5 6 7
![Page 5: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/5.jpg)
4 - 5Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
TOTAL AND MARGINAL UTILITYTacos
consumedper meal
TotalUtility,Utils
MarginalUtility,Utils
012
01018
10 8
Units consumed per meal
Units consumed per meal
30
20
10
To
tal
Uti
lity
(u
tils
)M
arg
ina
l U
tili
ty (
uti
ls)
10 8 6 4 2 0 -2
0 1 2 3 4 5 6 7
1 2 3 4 5 6 7
![Page 6: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/6.jpg)
4 - 6Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
TOTAL AND MARGINAL UTILITYTacos
consumedper meal
TotalUtility,Utils
MarginalUtility,Utils
0123
0101824
10 8 6
0 1 2 3 4 5 6 7
Units consumed per meal
Units consumed per meal
30
20
10
To
tal
Uti
lity
(u
tils
)M
arg
ina
l U
tili
ty (
uti
ls)
10 8 6 4 2 0 -2
1 2 3 4 5 6 7
![Page 7: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/7.jpg)
4 - 7Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
TOTAL AND MARGINAL UTILITYTacos
consumedper meal
TotalUtility,Utils
MarginalUtility,Utils
01234
010182428
10 8 6 4 Units consumed per meal
Units consumed per meal
30
20
10
To
tal
Uti
lity
(u
tils
)M
arg
ina
l U
tili
ty (
uti
ls)
10 8 6 4 2 0 -2
0 1 2 3 4 5 6 7
1 2 3 4 5 6 7
![Page 8: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/8.jpg)
4 - 8Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
TOTAL AND MARGINAL UTILITYTacos
consumedper meal
TotalUtility,Utils
MarginalUtility,Utils
012345
01018242830
10 8 6 4 2
Units consumed per meal
Units consumed per meal
30
20
10
To
tal
Uti
lity
(u
tils
)M
arg
ina
l U
tili
ty (
uti
ls)
10 8 6 4 2 0 -2
0 1 2 3 4 5 6 7
1 2 3 4 5 6 7
![Page 9: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/9.jpg)
4 - 9Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
TOTAL AND MARGINAL UTILITYTacos
consumedper meal
TotalUtility,Utils
MarginalUtility,Utils
0123456
0101824283030
10 8 6 4 2 0
Units consumed per meal
Units consumed per meal
30
20
10
To
tal
Uti
lity
(u
tils
)M
arg
ina
l U
tili
ty (
uti
ls)
10 8 6 4 2 0 -2
0 1 2 3 4 5 6 7
1 2 3 4 5 6 7
![Page 10: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/10.jpg)
4 - 10Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
TOTAL AND MARGINAL UTILITYTacos
consumedper meal
TotalUtility,Utils
MarginalUtility,Utils
01234567
010182428303028
10 8 6 4 2 0 -2
Units consumed per meal
Units consumed per meal
30
20
10
To
tal
Uti
lity
(u
tils
)M
arg
ina
l U
tili
ty (
uti
ls)
10 8 6 4 2 0 -2
TU
MU
0 1 2 3 4 5 6 7
1 2 3 4 5 6 7
![Page 11: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/11.jpg)
4 - 11Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
TOTAL AND MARGINAL UTILITYTacos
consumedper meal
TotalUtility,Utils
MarginalUtility,Utils
01234567
010182428303028
10 8 6 4 2 0 -2
Units consumed per meal
Units consumed per meal
30
20
10
To
tal
Uti
lity
(u
tils
)M
arg
ina
l U
tili
ty (
uti
ls)
10 8 6 4 2 0 -2
TU
MU
0 1 2 3 4 5 6 7
1 2 3 4 5 6 7
ObserveDiminishing
MarginalUtility
![Page 12: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/12.jpg)
4 - 12Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
THEORY OF CONSUMER BEHAVIOR
A Typical Consumer...• Exhibits Rational
Behavior• Has Clear-Cut
Preferences• Subject to a Budget
Constraint• Responds to Price
Changes
![Page 13: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/13.jpg)
4 - 13Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
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...
![Page 14: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/14.jpg)
4 - 14Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
First 10 10 24 12
Unit ofproduct
$ 10 incomeProduct A: Price = $1 Product B: Price = $2
Marginalutility,utils
Marginalutility per
dollar(MU/price)
Marginalutility,utils
Marginalutility per
dollar(MU/price)
UTILITY MAXIMIZING COMBINATION
How should the $10 Income be allocated?
![Page 15: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/15.jpg)
4 - 15Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
First 10 10 24 12
Unit ofproduct
$ 10 incomeProduct A: Price = $1 Product B: Price = $2
Marginalutility,utils
Marginalutility per
dollar(MU/price)
Marginalutility,utils
Marginalutility per
dollar(MU/price)
UTILITY MAXIMIZING COMBINATION
Examine the twomarginal utilities
![Page 16: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/16.jpg)
4 - 16Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
First 10 10 24 12
Unit ofproduct
$ 10 incomeProduct A: Price = $1 Product B: Price = $2
Marginalutility,utils
Marginalutility per
dollar(MU/price)
Marginalutility,utils
Marginalutility per
dollar(MU/price)
UTILITY MAXIMIZING COMBINATION
Examine the twomarginal utilities
…per dollar
![Page 17: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/17.jpg)
4 - 17Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
First 10 10 24 12
Unit ofproduct
$ 10 incomeProduct A: Price = $1 Product B: Price = $2
Marginalutility,utils
Marginalutility per
dollar(MU/price)
Marginalutility,utils
Marginalutility per
dollar(MU/price)
UTILITY MAXIMIZING COMBINATION
Decision: Buy 1Product B for $2
![Page 18: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/18.jpg)
4 - 18Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
First 10 10 24 12Second 8 8 20 10Third 7 7 18 9Fourth 6 6 16 8Fifth 5 5 12 6Sixth 4 4 6 3Seventh 3 3 4 2
Unit ofproduct
$ 10 incomeProduct A: Price = $1 Product B: Price = $2
Marginalutility,utils
Marginalutility per
dollar(MU/price)
Marginalutility,utils
Marginalutility per
dollar(MU/price)
UTILITY MAXIMIZING COMBINATION
What next?
![Page 19: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/19.jpg)
4 - 19Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
First 10 10 24 12Second 8 8 20 10Third 7 7 18 9Fourth 6 6 16 8Fifth 5 5 12 6Sixth 4 4 6 3Seventh 3 3 4 2
Unit ofproduct
$ 10 incomeProduct A: Price = $1 Product B: Price = $2
Marginalutility,utils
Marginalutility per
dollar(MU/price)
Marginalutility,utils
Marginalutility per
dollar(MU/price)
UTILITY MAXIMIZING COMBINATION
What next?Buy one of each
![Page 20: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/20.jpg)
4 - 20Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
First 10 10 24 12Second 8 8 20 10Third 7 7 18 9Fourth 6 6 16 8Fifth 5 5 12 6Sixth 4 4 6 3Seventh 3 3 4 2
Unit ofproduct
$ 10 incomeProduct A: Price = $1 Product B: Price = $2
Marginalutility,utils
Marginalutility per
dollar(MU/price)
Marginalutility,utils
Marginalutility per
dollar(MU/price)
UTILITY MAXIMIZING COMBINATION
and then...($5 left)
![Page 21: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/21.jpg)
4 - 21Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
First 10 10 24 12Second 8 8 20 10Third 7 7 18 9Fourth 6 6 16 8Fifth 5 5 12 6Sixth 4 4 6 3Seventh 3 3 4 2
Unit ofproduct
$ 10 incomeProduct A: Price = $1 Product B: Price = $2
Marginalutility,utils
Marginalutility per
dollar(MU/price)
Marginalutility,utils
Marginalutility per
dollar(MU/price)
UTILITY MAXIMIZING COMBINATION
third unit of product B
![Page 22: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/22.jpg)
4 - 22Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
First 10 10 24 12Second 8 8 20 10Third 7 7 18 9Fourth 6 6 16 8Fifth 5 5 12 6Sixth 4 4 6 3Seventh 3 3 4 2
Unit ofproduct
$ 10 incomeProduct A: Price = $1 Product B: Price = $2
Marginalutility,utils
Marginalutility per
dollar(MU/price)
Marginalutility,utils
Marginalutility per
dollar(MU/price)
UTILITY MAXIMIZING COMBINATION
$3 left...
![Page 23: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/23.jpg)
4 - 23Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
First 10 10 24 12Second 8 8 20 10Third 7 7 18 9Fourth 6 6 16 8Fifth 5 5 12 6Sixth 4 4 6 3Seventh 3 3 4 2
Unit ofproduct
$ 10 incomeProduct A: Price = $1 Product B: Price = $2
Marginalutility,utils
Marginalutility per
dollar(MU/price)
Marginalutility,utils
Marginalutility per
dollar(MU/price)
UTILITY MAXIMIZING COMBINATION
$3 left...Buy both!
![Page 24: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/24.jpg)
4 - 24Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
First 10 10 24 12Second 8 8 20 10Third 7 7 18 9Fourth 6 6 16 8Fifth 5 5 12 6Sixth 4 4 6 3Seventh 3 3 4 2
Unit ofproduct
$ 10 incomeProduct A: Price = $1 Product B: Price = $2
Marginalutility,utils
Marginalutility per
dollar(MU/price)
Marginalutility,utils
Marginalutility per
dollar(MU/price)
UTILITY MAXIMIZING COMBINATION
Income is gone...the last dollar spent on
each good gave the sameutility (8) per dollar
![Page 25: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/25.jpg)
4 - 25Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
Algebraic Restatement of theUtility Maximization Rule
MU of product A
Price of A
MU of product B
Price of B=
UTILITY MAXIMIZING COMBINATION
![Page 26: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/26.jpg)
4 - 26Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
UTILITY MAXIMIZATION ANDTHE DEMAND CURVE
Create a demand schedule from thepurchase 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
![Page 27: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/27.jpg)
4 - 27Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
UTILITY MAXIMIZATION ANDTHE DEMAND CURVE
Deriving the Demand Schedule and Curve
Quantity Demanded of Good B
Pri
ce p
er u
nit
of
Goo
d B $2
1
0 4 6
DB
![Page 28: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/28.jpg)
4 - 28Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
Indifference Curve Analysis
4LECTURE
APPENDIX
![Page 29: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/29.jpg)
4 - 29Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
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A CONSUMER’S PRODUCTINDIFFERENCE
Qu
an
tity
of
A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
Units ofA Price$1.50
Units ofB Price$1.00
TotalExpenditures
8 0 $126 3 124 6 122 9 120 12 12An Indifference
ScheduleCombi-nation
Unitsof A
Unitsof B
j 12 2k 6 4l 4 6m 3 8
j
k
lm
I
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4 - 30Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
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A CONSUMER’S BUDGET LINE
Units ofA Price$1.50
Units ofB Price$1.00
TotalExpenditures
8 0 $126 3 124 6 122 9 120 12 12
(Attainable)Q
ua
nti
ty o
f A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
(Unattainable)
![Page 31: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/31.jpg)
4 - 31Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
A CONSUMER’S BUDGET LINE
Units ofA Price$1.50
Units ofB Price$1.00
TotalExpenditures
8 0 $126 3 124 6 122 9 120 12 12
(Attainable)Q
ua
nti
ty o
f A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
(Unattainable)An Increase in incomemakes the purchase of more of either or both
items possible
![Page 32: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/32.jpg)
4 - 32Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
A CONSUMER’S BUDGET LINE
Units ofA Price$1.50
Units ofB Price$1.00
TotalExpenditures
8 0 $126 3 124 6 122 9 120 12 12
(Attainable)Q
ua
nti
ty o
f A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
(Unattainable)Price changes cause
a change in the quantitydemanded of the items
![Page 33: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/33.jpg)
4 - 33Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
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EndShow
A CONSUMER’S EQUILIBRIUM POSITION
I1
I2
Qu
an
tity
of
A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
I3
I4
(Attainable)
(Unattainable)
Units ofA Price$1.50
Units ofB Price$1.00
TotalExpenditures
8 0 $126 3 124 6 122 9 120 12 12An Indifference
ScheduleCombi-nation
Unitsof A
Unitsof B
j 12 2k 6 4l 4 6m 3 8
![Page 34: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/34.jpg)
4 - 34Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
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What happens if the price of Bincreases to $1.50
PriceB QuantityB
$1.00 6
A CONSUMER’S EQUILIBRIUM POSITION
I3
The budget linerotates reflectingthe reduction inthe quantity of B
units which isattainable
Qu
an
tity
of
A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
![Page 35: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/35.jpg)
4 - 35Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
What happens if the price of Bincreases to $1.50
PriceB QuantityB
$1.00 1.50
63
By recording thevarious quantitiesdemanded at thevarious prices yieldsthe Demand schedule
A CONSUMER’S EQUILIBRIUM POSITION
I2
I3
The budget linerotates reflectingthe reduction inthe quantity of B
units which isattainable
Qu
an
tity
of
A
Quantity of B
12
10
8
6
4
2
02 4 6 8 10 12
![Page 36: 4 - 1 Copyright McGraw-Hill/Irwin, 2002 The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior Utility.](https://reader035.fdocuments.net/reader035/viewer/2022062803/56649f485503460f94c6a301/html5/thumbnails/36.jpg)
4 - 36Copyright McGraw-Hill/Irwin, 2002
The Law of Demand
Law of Diminishing Marginal Utility
Total and Marginal Utility
Theory of Consumer Behavior
Utility Maximizing Combination
Utility Maximization and the Demand Curve
Applications and Extensions
Key Terms
PreviousSlide
NextSlide
EndShow
What happens if the price of Bincreases to $1.50
PriceB QuantityB
$1.00 1.50
63
By recording thevarious quantitiesdemanded at thevarious prices yieldsthe Demand schedule
A CONSUMER’S EQUILIBRIUM POSITION
Price of B
Quantity of B
$1.50
1.00
0
2 4 6 8 10 12
DB
Plotting the Points yields the Demand Curve for Product B