The Logic of Individual Choice: The Foundation of Supply and Demand ppt
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© 2003 McGraw-Hill Ryerson Limited
Chapter 8
Chapter 8
© 2003 McGraw-Hill Ryerson Limited.
8 - 2
◆
Economists have an answer to the
question of why people behave as they
do — self interest.
●
Economists' analysis of individual
choice does not deny individual
dierences.
© 2003 McGraw-Hill Ryerson Limited.
8 - 3
◆
A good beginning in understanding
individual choice is to focus on the
rational part of people's behavior.
© 2003 McGraw-Hill Ryerson Limited.
8 - 4
◆
Using the simple concept of self-
interest, two things determine what
people do:
●
The pleasure people get from doing
or consuming something.
●
The price of doing or consuming that
something.
© 2003 McGraw-Hill Ryerson Limited.
8 - 5
◆
Price is the market's tool to bring quantity
supplied equal to the quantity demanded.
◆
Changes in price provide incentives for
people to change what they are doing.
© 2003 McGraw-Hill Ryerson Limited.
8 - 6
◆
Economists start with a proposition that
individuals try to get as much pleasure
as possible out of life.
◆
The goods and services we consume
provide value (satisfaction) to us.
© 2003 McGraw-Hill Ryerson Limited.
8 - 7
◆
Individuals want to maximize the
amount of satisfaction they receive
through consuming goods and services.
© 2003 McGraw-Hill Ryerson Limited.
8 - 8
◆
Economists use the concept of utility—
the pleasure or satisfaction that one
gets from consuming a good or service.
◆
A util is a unit created by economists to
“measure” utility.
© 2003 McGraw-Hill Ryerson Limited.
8 - 9
◆
Utility serves as the basis of
economists' analysis of individual
choice.
◆
It is personal and individual.
◆
Utility cannot be compared across
individuals.
© 2003 McGraw-Hill Ryerson Limited.
8 - 10
◆
Total utility refers to the total
satisfaction one gets from consuming a
product.
© 2003 McGraw-Hill Ryerson Limited.
8 - 11
◆
Marginal utility refers to the
satisfaction one gets from the
consumption of one additional unit of a
product above and beyond what on has
consumed up to that point.
© 2003 McGraw-Hill Ryerson Limited.
8 - 12
◆
As additional units are consumed, marginal
utility decreases while total utility increases.
◆
When marginal utility is zero, total utility stops increasing.
◆
Beyond this point, marginal utility is negative and total
utility decreases.
© 2003 McGraw-Hill Ryerson Limited.
8 - 13
Number of
pizza slices
1
2
3
4
5
6
7
8
9
Total utility
14
26
36
44
50
54
56
56
54
Marginal utility
14
12
10
8
6
4
2
0
-2
!"#$ $"%
!"#$ $"%
© 2003 McGraw-Hill Ryerson Limited.
8 - 14
Total utility Marginal utility
Slices of pizza per hour
70
60
50
40
30
20
10
0
1 2 3 4 5 6 7 8 9
Slices of pizza per hour
16
14
12
10
8
6
4
2
0
-2
1 2 3 4 5 6 7 8 9
!"#$& $"%
!"#$& $"%
Total utility
Marginal utility
Utils Utils
© 2003 McGraw-Hill Ryerson Limited.
8 - 15
◆
The principle of diminishing marginal
utility states that, at some point, the
marginal utility received from each
additional unit of a good begins to
decrease with each additional unit
consumed.
© 2003 McGraw-Hill Ryerson Limited.
8 - 16
◆
This principle does not say you do not
enjoy consuming more of a good.
◆
It only states that as you consume more of the
good, you enjoy additional units less than you
enjoyed the initial units.
© 2003 McGraw-Hill Ryerson Limited.
8 - 17
'
'
◆
The analysis of rational choice begins
with the premise that rational individuals
want as much satisfaction as they can
get from their available income.
◆
Rational means that people prefer more
to less and will make choices that give
them as much satisfaction as possible.
© 2003 McGraw-Hill Ryerson Limited.
8 - 18
'
'
◆
In making choices, essentially what you
are doing is buying units of utility.
◆
Any choice (for the same amount of
money) that does not give you as many
units of utility as possible is an irrational
choice.
© 2003 McGraw-Hill Ryerson Limited.
8 - 19
'
'
◆
Since you want to get the most for your
money, you make those choices that
have the highest units of utility per
dollar spent.
© 2003 McGraw-Hill Ryerson Limited.
8 - 20
()
()
◆
Total utility is maximized when marginal
utility per dollar spent of two goods is
equal.
y
y
x
x
P
MU
P
MU
=
© 2003 McGraw-Hill Ryerson Limited.
8 - 21
()
()
◆
If:
y
y
x
x
P
MU
P
MU
>
◆
Choose to consume an additional unit of good x.
© 2003 McGraw-Hill Ryerson Limited.
8 - 22
()
()
◆
If:
y
y
x
x
P
MU
P
MU
<
◆
Choose to consume an additional unit of good y.
© 2003 McGraw-Hill Ryerson Limited.
8 - 23
()
()
◆
By substituting the marginal utilities and
prices of goods into these formulas, you
can always decide which good it makes
more sense to consume.
◆
Consume the one with the highest
marginal utility per dollar.
© 2003 McGraw-Hill Ryerson Limited.
8 - 24
()
()
*+&
*+&
◆
When the ratios of the marginal utility to
price of goods are equal, you are
maximizing utility.
© 2003 McGraw-Hill Ryerson Limited.
8 - 25
()
()
◆
If:
y
y
x
x
P
MU
P
MU
=
◆
You’re in equilibrium.
◆
You cannot increase your utility by
adjusting your choices.
