Download CH7 Consumer Choice The Marginal Principle and Individual

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
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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