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CH7 Consumer Choice The Marginal Principle and Individual Demand Each individual makes rational decision to stop buying when marginal benefit equals marginal cost Total and Marginal Utility Utility: customer’s satisfaction from using the product, measured in utils Total utility: total amt of satisfaction from whatever quantity of the product the consumer receives Marginal utility: change in utility resulting from buying one additional unit Law of diminishing marginal utility: as consumption increases, utility decreases, even negatively if too far The Marginal Benefit Curve Decreases with each increase in unit, negatively sloped The Marginal Cost Curve Increases with each increase in unit, positively sloped Finding a Point on the Demand Curve Graph marginal benefit against marginal cost, intersect point is on demand curve. Impossible to measure utility but important concept nevertheless The Utility-Maximizing Rule Utility-maximizing rule: pick affordable combination of consumer goods that makes the marginal utility per dollar spent on one good equal to the marginal utility per dollar spent on the second good The Budget Set and Budget Line Budget set: all the combinations of two goods the consumer can afford, given his / her income and prices of the two goods Budget line: shows combos that exhaust his / her budget Slope of budget line: trade off b/w the two goods Indifference Curves Indifference curve: shows combos of two goods that generate same amt. of utility or satisfaction. 3 groups: +,=, Superior combinations: above curve, generate more utility, more of both goods Inferior combinations: below curve, generate less utility, less of both goods Equivalent combinations: same satisfaction and utility, same as satisfaction obtained from indifference curve base point. Indifference curve negatively sloped, flatter as move downward along curve b/c of diminishing marginal utility Subjective preferences of individual consumer Indifference map: set of different indifference curves, each w/ diff lvl of utility Marginal Rate of Substitution: rate at which consumer willing to substitute one good for another (subjective trade-off of utils) Smaller the # of one good the higher utils / good Higher the # of oen good the lower the utils / good Maximizing Utility Bob wants highest utility, will reach highest indifference curve possible given budget set Even if point is on budget curve (maximize budget) might not be maximizing indifference curve (utility) Obvious budget constraints Most efficient (maximize) utility is indifference curve tangent to budget curve At point of tangency MRS = market price ratio, most efficient for consumer Drawing the Demand Curve Max utility at a certain price of one good, change price of good (only one measured on demand curve) and find new util max. Draw new budget line as price of one good decreases, find max util (tangent indifference curve) Consistent with law of demand: lower price, larger quantity demanded, ceterus paribus