Econ 201, Week 6
Econ 201, Week 6 ECN 201 (Professor Colleen Scott)
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This 2 page Class Notes was uploaded by Thanh Notetaker on Sunday March 6, 2016. The Class Notes belongs to ECN 201 (Professor Colleen Scott) at La Salle University taught by Colleen Scott in Spring 2016. Since its upload, it has received 19 views. For similar materials see Introductory Microeconomics in Economcs at La Salle University.
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Date Created: 03/06/16
ECON 201. Week Six (March 3 note) Consumption choices The choices you make as a buyer of goods and services are influenced by many factors, which economists summarize as Consumption possibilities Preferences Consumption Possibilities Consumption possibilities are all the things that a consumer can afford to buy. A Consumer’s Budget Line Consumption possibilities are limited by income, the price of a movie, and the price of soda. Budget line shows the limits of consumption possibilities. Preferences The choice that one makes depends on preferences—likes and dislikes. Benefit or satisfaction from consuming a good or service is called utility. Total Utility Total utility is the total benefit a person gets from the consumption of goods. Generally, more consumption gives more total utility. Marginal Utility Marginal utility from a good is the change in total utility that results from a unit-increase in the quantity of the good consumed. As the quantity consumed of a good increases, the marginal utility from it decreases. We call this decrease in marginal utility as the quantity of the good consumed increases the principle of diminishing marginal utility. The key assumption is that the household chooses the consumption possibility that maximizes total utility. A Spreadsheet Solution The direct way to find the utility-maximizing choice is to make a table in a spreadsheet and do the calculations. Find the just-affordable combinations Find the total utility for each just-affordable combination The utility-maximizing combination is the consumer’s choice A more natural way of finding the consumer equilibrium is to use the idea of choices made at the margin. Choosing at the Margin Marginal utility is the increase in total utility that results from consuming one more unit of the good. The marginal utility per dollar is the marginal utility from a good that results from spending one more dollar on it. Marginal Utility Rule 1 The marginal utility per dollar equals the marginal utility from a good divided by its price. 2 Calling the marginal utility from movies MU Mnd the price of a movie P ,Mthen the marginal utility per dollar from movies is MU /M . Utility-Maximizing Rule A consumer’s total utility is maximized by following the rule: Spend all available income Equalize the marginal utility per dollar for all goods