Microeconomics Chapter 18
Microeconomics Chapter 18 ECON 2106
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Date Created: 10/10/16
Chapter 16. Consumer Choice How do economists model consumer satisfaction? Utility- a measure of the relative levels of satisfaction that consumers enjoy from the consumption of goods and services. Util – unit to measure utility. Utility (happiness) is balance between economic and personal factors. Total utility and marginal utility Marginal utility- the extra satisfaction enjoyed from consuming one more unit (brownie). When marginal utility becomes negative, it means that the consumer is tired of this product. Diminishing marginal utility- when marginal utility declines as consumption increases. How do consumers optimize their purchasing decision? Consumer optimum- the combination of goods and services that maximizes the satisfaction, or utility, we got from our income or budget. Consumer Purchasing Division MU (1 good)/ Price (2dgood) what is more? MU (1 good)/Price (2d good) (1) (2) (3) (4) (5) (6) Pepsi Margin MU Pepsi / Pizza Margin MU pizza / consu al Price Pepsi consu al Price pizza med utility (Pepsi med utility (pizza (cans) (MU $1/can) (slices) (MU $2/slice) Pepsi) pizza) 1 9 9/1 = 9 1 20 20/2 = 10 2 8 8/1 = 8 2 16 16/2 = 8 3 7 7/1 = 7 3 12 12/2 = 6 4 6 6/1 = 6 4 8 8/2 = 4 (Mateer 500) 5 5/1 = 5 5 4 4/2 = 2 Mateer, Dirk, Lee Coppock. Principles of Microeconomics (ePub). W. W. Norton & Company, 07/2014. VitalBook file. Maximum utility from: 4 Pepsi (9+8+7+6) and 3 pizza slices (20+16+12) = 78 utils Marginal thinking with more than two goods Consumer’s income is balanced so that the ratio of the marginal utility per dollar spent on every item, for good A to good Z is equal. MU (A)/ Price (A)= MU (B)/ Price (B)=… Price change and consumer optimum The lower price of product will increase the quantity of this product that consumer will buy. MU pizza (12utils)/ $1.5> MU Pepsi (6 utils)/ $1 !!!Lower price increase marginal utility per dollar spent, consumer will buy more goods. Price change has two effects: 1) Marginal utility per dollar spent is higher, consumer substitute the product that has become relatively less expensive (substitution effect). 2) Price change can also change the purchasing power of income (real-income effect). Matters when prices change enough to cause measurable effect on purchasing power of consumer’s income. What is the Diamond-Water paradox? It explains why water, which is essential for life, is expensive while diamonds, which don’t sustain life, are expensive. Water creates significantly more total utility than diamonds do. Something quite plentiful (water) would yield less marginal utility than something rare (diamonds). Since water is abundant in most places, the price (P water) is low. Diamonds are rare and their price (P diamond) is high. !!! The cost of obtaining a diamond means that a consumer must get a great deal of marginal utility from purchase of diamond to justify the expense.
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