macroeconomic mcgrowhill micro ch 6 19e use this one

06
Consumer Behavior

McGraw-Hill/Irwin

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.


Chapter Objectives

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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• Total Utility, Marginal Utility, and the Law of
Diminishing Marginal Utility
• How Rational Consumers Compare Marginal
Utility-to-Price Ratios for Products in
Purchasing Combinations to Maximize Total
Utility
• How to Derive the Demand Curve by
Observing Behavior
• How the Utility-Maximization Model
Highlights Income and Substitution Effects of a
Price Change
• Budget Lines, Indifference Curves, Utility
Maximization, and Demand Derivation in the
Indifference Curve Model of Consumer
Behavior
Copyright McGraw-Hill/Irwin, 2002


THE LAW OF DEMAND

A Closer Look…

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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The Income Effect

A lower price frees income
for additional purchases and vice versa

The Substitution Effect
A lower price relative to other
goods attracts new buyers and vice versa

Copyright McGraw-Hill/Irwin, 2002


The Law of Demand
Law of Diminishing
Marginal Utility
Total and Marginal
Utility

LAW OF DIMINISHING
MARGINAL UTILITY

• Utility Defined
• Subjective Nature
• Difficult to Quantify
Total Utility
Marginal Utility
graphically examine

Theory of Consumer
Behavior
Utility Maximizing
Combination

Utility Maximization
and the Demand
Curve
Applications and
Extensions
Key Terms

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End
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Copyright McGraw-Hill/Irwin, 2002


TOTAL AND MARGINAL UTILITY
Law of Diminishing
Marginal Utility
Total and Marginal
Utility
Theory of Consumer
Behavior
Utility Maximizing
Combination

0
1

0
10

30

Total Utility (utils)

The Law of Demand

Tacos
Total Marginal
consumed Utility, Utility,
per meal Utils
Utils

Utility Maximization
and the Demand
Curve

Marginal Utility (utils)

Key Terms

End
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21 - 5

10

0

Applications and
Extensions

Previous

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20

Next
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1

3

4

5

6

7

Units consumed per meal

10
8
6
4
2
0
-2
1

Copyright McGraw-Hill/Irwin, 2002

2

2

3

4

5

6

7

Units consumed per meal


TOTAL AND MARGINAL UTILITY
Law of Diminishing
Marginal Utility
Total and Marginal
Utility
Theory of Consumer
Behavior
Utility Maximizing
Combination

0

1

0
10

10

30
Total Utility (utils)

The Law of Demand

Tacos
Total Marginal
consumed Utility, Utility,
per meal Utils
Utils

Utility Maximization
and the Demand
Curve

Marginal Utility (utils)

Key Terms

End
Show
21 - 6

10

0

Applications and
Extensions

Previous
Slide

20

Next
Slide

1

3

4

5

6

7

Units consumed per meal

10

8
6
4
2
0
-2
1

Copyright McGraw-Hill/Irwin, 2002

2

2

3

4

5

6

7

Units consumed per meal


TOTAL AND MARGINAL UTILITY
Law of Diminishing
Marginal Utility

Total and Marginal
Utility
Theory of Consumer
Behavior
Utility Maximizing
Combination
Utility Maximization
and the Demand
Curve

0
1
2

0
10
18

10
8

Marginal Utility (utils)

Key Terms

End
Show
21 - 7

20

10

0

Applications and
Extensions

Previous
Slide

30
Total Utility (utils)

The Law of Demand

Tacos
Total Marginal
consumed Utility, Utility,
per meal Utils
Utils

Next
Slide

1

3

4

5

6

7

Units consumed per meal

10
8
6
4
2
0
-2
1

Copyright McGraw-Hill/Irwin, 2002

2

2

3

4

5

6

7

Units consumed per meal


TOTAL AND MARGINAL UTILITY
Law of Diminishing
Marginal Utility
Total and Marginal
Utility
Theory of Consumer
Behavior
Utility Maximizing
Combination
Utility Maximization
and the Demand
Curve

0
1
2
3

0
10
18
24

10

8
6

Key Terms

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End
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20
10

0

Marginal Utility (utils)

Applications and
Extensions

30
Total Utility (utils)

The Law of Demand

Tacos

Total Marginal
consumed Utility, Utility,
per meal Utils
Utils

1

3

4

5

6

7

Units consumed per meal

10
8
6
4
2
0
-2
1

Copyright McGraw-Hill/Irwin, 2002

2

2

3

4

5

6

7

Units consumed per meal


TOTAL AND MARGINAL UTILITY

Total and Marginal
Utility
Theory of Consumer
Behavior
Utility Maximizing
Combination
Utility Maximization
and the Demand
Curve
Applications and
Extensions

0
1
2
3
4

0
10
18
24
28

10
8
6
4

Key Terms

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End
Show
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Total Utility (utils)

Law of Diminishing
Marginal Utility

30
20
10

0

Marginal Utility (utils)

The Law of Demand

Tacos
Total Marginal
consumed Utility, Utility,
per meal Utils
Utils

1

3

4

5

6

7

Units consumed per meal

10
8
6
4
2
0
-2
1

Copyright McGraw-Hill/Irwin, 2002

2

2

3

4

5

6

7

Units consumed per meal

TOTAL AND MARGINAL UTILITY

Total and Marginal
Utility
Theory of Consumer
Behavior
Utility Maximizing
Combination
Utility Maximization
and the Demand
Curve
Applications and
Extensions
Key Terms

Previous
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End
Show
21 - 10

0
1
2
3
4
5

0
10
18
24
28
30

10
8
6
4
2

Next
Slide

Total Utility (utils)

Law of Diminishing
Marginal Utility

30
20
10

0

Marginal Utility (utils)

The Law of Demand

Tacos
Total Marginal
consumed Utility, Utility,
per meal Utils
Utils

1

3

4

5

6

7

Units consumed per meal

10
8
6
4
2
0
-2
1

Copyright McGraw-Hill/Irwin, 2002

2

2

3

4

5

6

7

Units consumed per meal


TOTAL AND MARGINAL UTILITY

Total and Marginal
Utility
Theory of Consumer
Behavior
Utility Maximizing
Combination
Utility Maximization
and the Demand
Curve

Applications and
Extensions
Key Terms

Previous
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End
Show
21 - 11

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0
1
2
3
4
5
6

0
10
18
24
28
30
30

10

8
6
4
2
0

Total Utility (utils)

Law of Diminishing
Marginal Utility

30
20
10

0

Marginal Utility (utils)

The Law of Demand

Tacos
Total Marginal
consumed Utility, Utility,
per meal Utils
Utils

1

3

4

5

6

7

Units consumed per meal

10
8
6
4
2
0
-2
1

Copyright McGraw-Hill/Irwin, 2002

2

2

3

4

5

6

7

Units consumed per meal


TOTAL AND MARGINAL UTILITY

Total and Marginal
Utility
Theory of Consumer
Behavior
Utility Maximizing
Combination
Utility Maximization
and the Demand
Curve
Applications and
Extensions
Key Terms

Previous
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End
Show
21 - 12

Next
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0
1
2
3
4
5
6
7

0
10
18
24
28
30
30
28

10
8
6
4
2
0
-2

Copyright McGraw-Hill/Irwin, 2002

30
Total Utility (utils)

Law of Diminishing
Marginal Utility

TU

20
10

0

Marginal Utility (utils)

The Law of Demand

Tacos
Total Marginal
consumed Utility, Utility,
per meal Utils
Utils

1

2

3

4

5

6

7

Units consumed per meal

10
8
6
4
2
0
-2

MU
1

2

3

4

5

6

7

Units consumed per meal


TOTAL AND MARGINAL UTILITY

Total and Marginal
Utility
Theory of Consumer
Behavior
Utility Maximizing
Combination
Utility Maximization
and the Demand
Curve
Applications and
Extensions
Key Terms

Previous
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End
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21 - 13

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0
1
2
3
4
5
6
7

0
10
18
24
28
30
30
28

10
8
6
4
2
0
-2

Copyright McGraw-Hill/Irwin, 2002

30
Total Utility (utils)

Law of Diminishing
Marginal Utility

TU

20
10

0

Marginal Utility (utils)

The Law of Demand

Tacos
Total Marginal
consumed Utility, Utility,
per meal Utils
Utils

Observe
Diminishing
Marginal
Utility

1

2

3

4

5

6

7

Units consumed per meal

10
8
6
4
2
0
-2

MU
1

2

3

4

5

6

7

Units consumed per meal


THEORY OF CONSUMER BEHAVIOR

A Typical Consumer...

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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• Exhibits Rational
Behavior
• Has Clear-Cut
Preferences
• Subject to a Budget
Constraint
• Responds to Price
Changes

Copyright McGraw-Hill/Irwin, 2002


THEORY OF CONSUMER BEHAVIOR
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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End
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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..
Copyright McGraw-Hill/Irwin, 2002


UTILITY MAXIMIZING COMBINATION
$ 10 income

The Law of Demand
Law of Diminishing
Marginal Utility
Total and Marginal
Utility

Theory of Consumer
Behavior
Utility Maximizing
Combination

Unit of
product

First

Product A: Price = $1

Product B: Price = $2

Marginal
Marginal utility per
dollar
utility,
(MU/price)
utils

Marginal
utility per

dollar
(MU/price)

10

10

Marginal
utility,
utils

24

Utility Maximization
and the Demand
Curve
Applications and
Extensions
Key Terms

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How should the $10

Income be allocated?
Copyright McGraw-Hill/Irwin, 2002

12


UTILITY MAXIMIZING COMBINATION
$ 10 income

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

Previous
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End
Show

21 - 17

Next
Slide

Unit of
product

First

Product A: Price = $1

Product B: Price = $2

Marginal
Marginal utility per
dollar
utility,
(MU/price)
utils

Marginal
utility per
dollar
(MU/price)

10

10

Marginal
utility,
utils

24

12

Examine the two
marginal utilities
Copyright McGraw-Hill/Irwin, 2002


UTILITY MAXIMIZING COMBINATION
$ 10 income

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

Previous
Slide
End
Show
21 - 18

Next
Slide

Unit of
product

First

Product A: Price = $1

Product B: Price = $2

Marginal
Marginal utility per
dollar
utility,
(MU/price)
utils

Marginal
utility per

dollar
(MU/price)

10

10

Marginal
utility,
utils

24

12

Examine the two
marginal utilities
…per dollar
Copyright McGraw-Hill/Irwin, 2002


UTILITY MAXIMIZING COMBINATION
$ 10 income

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

Previous
Slide
End
Show
21 - 19

Next
Slide

Unit of
product

First

Product A: Price = $1

Product B: Price = $2

Marginal

Marginal utility per
dollar
utility,
(MU/price)
utils

Marginal
utility per
dollar
(MU/price)

10

10

Marginal
utility,
utils

24

12

Decision: Buy 1
Product B for $2
Copyright McGraw-Hill/Irwin, 2002


UTILITY MAXIMIZING COMBINATION
$ 10 income

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

Previous
Slide
End
Show
21 - 20

Next
Slide

Unit of
product

Product A: Price = $1

Product B: Price = $2

Marginal
Marginal utility per
dollar
utility,
(MU/price)
utils

Marginal
utility per
dollar
(MU/price)

Marginal
utility,
utils

First
10
10
24
Second 8
8
20
Third
7
7

18
Fourth What
6
6
16
next?
Fifth
5
5
12
Sixth
4
4
6
Seventh 3
3
4
Copyright McGraw-Hill/Irwin, 2002

12
10
9
8
6
3
2


UTILITY MAXIMIZING COMBINATION
$ 10 income

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

Previous
Slide
End
Show
21 - 21

Next
Slide

Unit of
product

Product A: Price = $1

Product B: Price = $2

Marginal
Marginal utility per
dollar
utility,
(MU/price)
utils

Marginal
utility per
dollar
(MU/price)

Marginal
utility,
utils

First
10
10
24
12
Second 8
8
20
10
Third

7
7
18
9
Fourth What
6
6
16
8
next?
Fifth
5
5
12
6
Buy one of each
Sixth
4
4
6
3
Seventh 3
3
4
2
Copyright McGraw-Hill/Irwin, 2002


UTILITY MAXIMIZING COMBINATION
$ 10 income

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

Previous
Slide
End
Show
21 - 22

Next
Slide

Unit of
product

Product A: Price = $1

Product B: Price = $2

Marginal
Marginal utility per
dollar
utility,
(MU/price)
utils

Marginal
utility per
dollar
(MU/price)

Marginal
utility,
utils

First
10
10
24
Second 8
8
20
Third
7
7

18
Fourth 6
6
16
and
then...
Fifth
5
5
12
($5 left)
Sixth
4
4
6
Seventh 3
3
4
Copyright McGraw-Hill/Irwin, 2002

12
10
9
8
6
3
2


UTILITY MAXIMIZING COMBINATION

$ 10 income

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

Previous
Slide
End
Show
21 - 23

Next
Slide

Unit of
product

Product A: Price = $1

Product B: Price = $2

Marginal
Marginal utility per
dollar
utility,
(MU/price)
utils

Marginal
utility per
dollar
(MU/price)

Marginal
utility,
utils

First
10
10
24
Second 8
8
20
Third
7

7
18
Fourth 6
6
16
third
unit
of
Fifth
5
5
12
product
Sixth
4
4 B 6
Seventh 3
3
4
Copyright McGraw-Hill/Irwin, 2002

12
10
9
8
6
3
2

UTILITY MAXIMIZING COMBINATION
$ 10 income

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

Previous
Slide
End
Show
21 - 24

Next
Slide

Unit of

product

Product A: Price = $1

Product B: Price = $2

Marginal
Marginal utility per
dollar
utility,
(MU/price)
utils

Marginal
utility per
dollar
(MU/price)

First
10
Second 8
Third
7
Fourth
6
$3 left...
Fifth
5
Sixth
4

Seventh 3
Copyright McGraw-Hill/Irwin, 2002

10
8
7
6
5
4
3

Marginal
utility,
utils

24
20
18
16
12
6
4

12
10
9
8
6
3
2

UTILITY MAXIMIZING COMBINATION
$ 10 income

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

Previous
Slide
End
Show
21 - 25

Next
Slide

Unit of
product

Product A: Price = $1

Product B: Price = $2

Marginal
Marginal utility per
dollar
utility,
(MU/price)
utils

Marginal
utility per
dollar
(MU/price)

First
10
10
Second 8
8
Third
7
7
Fourth
6

6
$3 left...
Fifth
5
5
Buy
both!
Sixth
4
4
Seventh 3
3
Copyright McGraw-Hill/Irwin, 2002

Marginal
utility,
utils

24
20
18
16
12
6
4

12
10
9
8

6
3
2