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AU / Economics / ECON 2020 / What are the reasons that make you buy a product?

# What are the reasons that make you buy a product? Description

##### Description: week 6 notes ***first week of notes for exam 3
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Week 6

## What are the reasons that make you buy a product?

2/24/16

 consumer behavior

o why do we buy stuff?

 To maximize utility:

∙ The satisfaction a consumer obtains from the

consumption of a good or service

∙    Utility facts:

o Measured in utils

o We CAN compare the utils assigned to multiple

goods by one person

o We CANNOT compare the utils assigned to a

good by multiple people

 people have different preferences, the

assessments differ

 Total vs. Marginal utility

∙ Total utility – the total satisfaction a person derives

## How can you tell which indifference curves represent higher or lower levels of utility?

form consuming some specific quantity

o TU increases as Qd increases (together)

o TU = Σ MU

∙ Marginal Utility – the additional utility a consumer

derives from an additional unit of a good

o Ex) date to all you can eat pizza buffet at Cici’s

Quantity

1

2

3

4

5

6

TU

15

28

39

48

55

60

MU

15

13

11

9

7

5

## Is defined as the satisfaction derived by a consumer from the consumption of a good?

Don't forget about the age old question of What controls insolation?

o How many utils did each slice of pizza add to

my overall happiness?

 0 units of something, 0 utils (nothing

gives you nothing)

 MU = ΔTU

 Law of Diminishing MU – as Qd rises, MU

falls (opposite)

∙ As MU falls, willingness to pay falls

as well

∙ The second slice isn’t going to add

as much happiness as the first

o When do we stop buying stuff?

 When we run out of moneyyyyyyy

∙ Budget line/constraint – the line that shows the

different consumption bundles a consumer can

purchase with a specific money income

o Consumption bundle – The combination of

goods and services consumed by an individual

o the price of a consumption bundle cannot

exceed the consumer’s total income If you want to learn more check out What is metmyoglobin and what color is it associated with?

o Income = (Qx * Px) + (Qy * Py) Don't forget about the age old question of How do we hear?

o Ex) assume a consumer with \$24 to spend is

choosing between \$4 hot dogs and \$2 chicken

fingers

 The consumer can purchase all bundles

on or to the left of the budget line

 If the consumer is at a bundle on the

budget line, the only way to consumer

more of one good is to give up some of

the other

 OC of x = max Qy / max Qx = Px / Py

OC of HD = 12/6 = 2C

OC of C = 6/12 = ½ HD

∙ Quantity: y / x If you want to learn more check out What did adam smith feel about government intervention in the economy?

o Giving up the other good

∙ Price: x / y

o Giving up the \$ you would’ve

used to buy the other good

o Factors that change the budget line

 Income – a change in income causes a

shift of the budget line

 Price of y – a change in price causes a  If you want to learn more check out What was jeremiah's main message in the bible?

rotation of the budget line

2/26/16

 Price of x – a change in price causes a

rotation of the budget line

If you want to learn more check out What are arteries in the circulatory system?

o What do we buy first?

 The good that gives us the most

∙ Marginal utility per dollar = MU / P

∙ Vacation vs. Cheeseburger

o MU of vacation = 50,000 utils

o MU of cheeseburger = 20 utils

o P of vacation = \$5,000

o P of cheeseburger = \$1

o MUv / Pv = 50,000 / 5,000 = 10

o MUc / Pc = 20 / 1 = 20

∙ Utility-Maximization Rule (aka Consumer Equilibrium)

o For utility maximization, the consumer must

get the same amount of utility from the last

dollar spent on each good

o Basically, TU is maximized when:

 All income is spent

 MUx / Px = MUy / Py

∙ Utility-Maximizing (Optimal) Consumption

o Optimal Consumption Bundle – the bundle that

maximizes total utility

o Ex) Find the optimal consumption bundle using:

 Consumer income = \$24

 Px = \$3

 Py = \$2

Qx

TUx

MUx

MUx / Px

Qy

TUy

MUy

MUy / Py

1

39

39

13

1

30

30

15

2

75

36

12

2

58

28

14

3

108

33

11

3

84

26

12

4

135

27

9

4

108

24

12

5

159

24

8

5

128

20

10

6

180

21

7

6

146

18

9

7

198

18

6

7

162

16

8

o Possible Optimal Bundles

 Use the income formula on possible

optimal bundles to determine if all \$ was

spent

(Income = (Qx * Px) + (Qy * Py)

 1x and 3y = (1 * 3) + (3 * 2) = \$9

 2x and 4y = (2 * 3) + (4 * 2) = \$14

 4x and 6y = (4 * 3) + (6 * 2) = \$24

 Optimal = 4 units of x and 6 units of y

 TU of bundle = 135 + 146 = 281 utils

o Graphing Optimal Consumption

 What happens if prices change?

∙ Rewrite the entire graph OR

∙ Use a graph

 Indifference curve – a line that shows the

consumption bundles that yield the same

amount of total utility

∙ Properties of (most) IC’s:

o downward sloping

o farther from the origin

represents a greater level of

TU

o never cross

o bowed inward

Week 6

2/24/16

 consumer behavior

o why do we buy stuff?

 To maximize utility:

∙ The satisfaction a consumer obtains from the

consumption of a good or service

∙    Utility facts:

o Measured in utils

o We CAN compare the utils assigned to multiple

goods by one person

o We CANNOT compare the utils assigned to a

good by multiple people

 people have different preferences, the

assessments differ

 Total vs. Marginal utility

∙ Total utility – the total satisfaction a person derives

form consuming some specific quantity

o TU increases as Qd increases (together)

o TU = Σ MU

∙ Marginal Utility – the additional utility a consumer

derives from an additional unit of a good

o Ex) date to all you can eat pizza buffet at Cici’s

Quantity

1

2

3

4

5

6

TU

15

28

39

48

55

60

MU

15

13

11

9

7

5

o How many utils did each slice of pizza add to

my overall happiness?

 0 units of something, 0 utils (nothing

gives you nothing)

 MU = ΔTU

 Law of Diminishing MU – as Qd rises, MU

falls (opposite)

∙ As MU falls, willingness to pay falls

as well

∙ The second slice isn’t going to add

as much happiness as the first

o When do we stop buying stuff?

 When we run out of moneyyyyyyy

∙ Budget line/constraint – the line that shows the

different consumption bundles a consumer can

purchase with a specific money income

o Consumption bundle – The combination of

goods and services consumed by an individual

o the price of a consumption bundle cannot

exceed the consumer’s total income

o Income = (Qx * Px) + (Qy * Py)

o Ex) assume a consumer with \$24 to spend is

choosing between \$4 hot dogs and \$2 chicken

fingers

 The consumer can purchase all bundles

on or to the left of the budget line

 If the consumer is at a bundle on the

budget line, the only way to consumer

more of one good is to give up some of

the other

 OC of x = max Qy / max Qx = Px / Py

OC of HD = 12/6 = 2C

OC of C = 6/12 = ½ HD

∙ Quantity: y / x

o Giving up the other good

∙ Price: x / y

o Giving up the \$ you would’ve

used to buy the other good

o Factors that change the budget line

 Income – a change in income causes a

shift of the budget line

 Price of y – a change in price causes a

rotation of the budget line

2/26/16

 Price of x – a change in price causes a

rotation of the budget line

o What do we buy first?

 The good that gives us the most

∙ Marginal utility per dollar = MU / P

∙ Vacation vs. Cheeseburger

o MU of vacation = 50,000 utils

o MU of cheeseburger = 20 utils

o P of vacation = \$5,000

o P of cheeseburger = \$1

o MUv / Pv = 50,000 / 5,000 = 10

o MUc / Pc = 20 / 1 = 20

∙ Utility-Maximization Rule (aka Consumer Equilibrium)

o For utility maximization, the consumer must

get the same amount of utility from the last

dollar spent on each good

o Basically, TU is maximized when:

 All income is spent

 MUx / Px = MUy / Py

∙ Utility-Maximizing (Optimal) Consumption

o Optimal Consumption Bundle – the bundle that

maximizes total utility

o Ex) Find the optimal consumption bundle using:

 Consumer income = \$24

 Px = \$3

 Py = \$2

Qx

TUx

MUx

MUx / Px

Qy

TUy

MUy

MUy / Py

1

39

39

13

1

30

30

15

2

75

36

12

2

58

28

14

3

108

33

11

3

84

26

12

4

135

27

9

4

108

24

12

5

159

24

8

5

128

20

10

6

180

21

7

6

146

18

9

7

198

18

6

7

162

16

8

o Possible Optimal Bundles

 Use the income formula on possible

optimal bundles to determine if all \$ was

spent

(Income = (Qx * Px) + (Qy * Py)

 1x and 3y = (1 * 3) + (3 * 2) = \$9

 2x and 4y = (2 * 3) + (4 * 2) = \$14

 4x and 6y = (4 * 3) + (6 * 2) = \$24

 Optimal = 4 units of x and 6 units of y

 TU of bundle = 135 + 146 = 281 utils

o Graphing Optimal Consumption

 What happens if prices change?

∙ Rewrite the entire graph OR

∙ Use a graph

 Indifference curve – a line that shows the

consumption bundles that yield the same

amount of total utility

∙ Properties of (most) IC’s:

o downward sloping

o farther from the origin

represents a greater level of  TU

o never cross

o bowed inward

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