Consumer Choice 4

7/27/2019 Consumer Choice 4

1/41

4

Consumer Choice:Individual and Market

DemandEverything is worth what its purchaser will pay for it.

PUBLILIUS SYRUS (1ST CENTURY B.C.)


2/41

Copyright 2003 South-Western/Thomson Learning. All rights reserved.

Scarcity and Demand

Utility: A Tool to Analyze Purchase

Decisions

Consumer Choice as a Trade-off:

Opportunity Cost

From Individual Demand Curves to Market

Demand Curves

Contents



3/41


Exceptions to the Law of Demand

Appendix: Analyzing Consumer Choice

Graphically: Indifference Curve Analysis

Contents (continued)



4/41


Scarcity and Demand

Income is limited.

Consumer decisions to purchase different

commodities are interdependent.


5/41


Utility: A Tool to AnalyzePurchase Decisions

The Purpose of Utility Analysis

The purpose of utility analysis = analyzing how

people behave rather than how they think Theory of consumer choice = each consumer

spends his or her income in a way that yields

the greatest satisfaction Utility = amount of satisfaction


6/41


Total versus Marginal Utility

Total utility = benefit to a consumer from all

the units of a good purchased Marginal utility = benefit from the last unit of

a good purchased

number of goods purchased total utilitybut a marginal utility



7/41Copyright 2003 South-Western/Thomson Learning. All rights reserved.

The Law of Diminishing Marginal Utility

The law of diminishing marginal utility = the

more of a good a consumer has, the lessmarginal utility an additional unit contributes

to overall satisfaction

Additional units of a commodity are worth lessand less to a consumer in money terms.



8/41

TABLE4-1 Your Total andMarginal Utility for Pizza



9/41

FIGURE 4-1 A Marginal UtilityCurve: Your Demand for Pizza

Number of Pizzas per Month

8

Marg

ina

lUtility(Pr

ice

)per

Pizza

$1615

141312

1110

98765

4321

0 7

H

G

F

E

D

CB

A

P P

654321





Using Marginal Utility: The Optimal

Purchase Rule

Buy the quantity of each good at which priceand marginal utility are exactly equal.

If marginal utility is greater (less) than price,

the consumer can improve well being bypurchasing more (less).


11/41

FIGURE 4-2 Finding Your OptimalPizza Purchase Quantity

M Total netutility hill

To

talNe

tUtility

Number of Pizzas

$98

7

654321

012

654321




From Diminishing Marginal Utility to

Downward-Sloping Demand Curves

Law of diminishing marginal utility negative slope of demand curves

price quantity of demand

marginal utility Restores equality between price and marginal

utility



13/41

TABLE 4-2 List of OptimalQuantities of Pizza




Consumer Choice as aTrade-Off: Opportunity Cost

Decision to purchase something decision

to forgo something else

Opportunity cost of spending an extra dollaron good X = the utility from good Y the

purchaser could have gotten by spending

that dollar on good Y


15/41


16/41

TABLE 4-3 Calculating MarginalNet Utility (Surplus)



17/41


18/41



Income and Quantity Demanded

Consumer Choice as aTrade-Off : Opportunity Cost

Income and Quantity Demanded

income purchases of normal goods

income purchases of inferior goods


20/41


21/41

FIGURE 4-4 Total Market Demandvs. Individual Consumer Demand

Price

Price

9 6

(c)

Quantity Demanded

150

M

M

Market demand

(b)

Quantity Demanded

60

Z

Z Naomisdemand

(a)

Quantity Demanded

Price

$10

90

CCNNAA

K

D

D

Alexsdemand




From Individual to MarketDemand Curves

Exceptions to the Law of Demand

Some inferior goods

Goods whose quality is judged by price Goods with snob appeal


23/41

Appendix:

Analyzing ConsumerChoice Graphically:

Indifference CurveAnalysis


24/41


Budget line

Graphical representation of all possible

combinations of a households purchases oftwo goods, given their prices and a fixed

amount of money to spend

Properties of the Budget Line Represents the maximum amounts of the goods

the consumer can afford

Geometry of AvailableChoices: The Budget Line


25/41

TABLE 4-4 Alternative PurchaseCombinations



26/41

FIGURE 4-5 A Budget Line

K

E

A

B

C

G

7

6

5

4

3

2

765432

1

0

Poun

dso

fCh

eese

Boxes of Rubber Bands

1

D



27/41


Changes in the Budget Line

income parallel shift in the budget line

relative prices of the goods slope of the budget line

Geometry of AvailableChoices: The Budget Line


28/41


29/41

FIGURE 4-7 The Effect of PriceChanges on the Budget Line

Rubber bandprice = $3.00

Rubber bandprice = $1.50

87654320 1

E H

A

7

6

5

4

3

2

1

Poun

dso

fC

heese




30/41


Indifference curve = a line connecting all

combinations of the goods that are equally

desirable Properties of the indifference curve:

higher is better

never intersect

negative slope

bowed in (convex)

Properties of theIndifference Curve


31/41

FIGURE 4-8 3 Indifference Curvesfor Cheese and Rubber Bands

IaIb

IC

R

T

U

S

8

7

6

5

4

3

2

765432

1

0

Poun

dso

fC

heese


1

W



32/41


33/41

FIGURE 4-9 Slopes of a BudgetLine and an Indifference Curve

E

r

I

I

R

B

B

0

Poun

dso

fCheese


F

D n

m

M

N



34/41

FIGURE 4-10 Optimal ConsumerChoice

1

2

3

4

5

6IaIb

Ic

U

K

7

7654320

Poun

dso

fC

heese


1

T

W



35/41


Tangency Conditions

Utility maximization point on the budget line

tangent to an indifference curve Marginal rate of substitution = price ratio at

that point

The Slopes of IndifferenceCurves and Budget Lines

S f ff


36/41


Consequences of Income Changes: Inferior

Goods

Inferior goods: indifference curves locatedsuch that income

purchases of one good

purchases of the other



37/41

4 12 Ri i I


38/41

FIGURE 4-12 Rise in Income,Rubber Bands Are Inferior Good

C

C

Optimalconsumptioncurve

B

B

4320

Poun

dso

fC

heese


1

H

G


Th Sl f I diff


39/41


Consequences of Price Changes: Deriving

the Demand Curve

slope of the budget line quantity purchased of that good

quantity of the other good



40/41

4 14 D i i th


41/41

FIGURE 4-14 Deriving theDemand Curve for Rubber Bands

D

DPric

eo

fRu

bber

Ban

dsper

Box

Quantity of Rubber BandsDemanded (boxes)

4321

1.50

3.00

$4.00

t

e

Consumer Choice 4

Documents

Transcript of Consumer Choice 4