Download Consumer Choice and Demand

Chapter 6
Consumer Choice & Demand
These slides supplement the
textbook, but should not
replace reading the textbook
1
In our analysis of
consumer choice, what
important assumption do
we make?
People would rather
have more than less
2
What is a
demand curve?
A demand curve shows
how many units will be
demanded at various prices
3
Why do demand
curves slope downward
to the right?
Because there will be an
change in the quantity
demanded as price changes
4
With a change in price,
what about other things?
When price changes
we assume that
everything else
stays the same
5
Demand Curve
P1
P2
Q1
Q2
D
6
What is the
difference between
wants and demand?
We live in a world of
unlimited wants - but the
things that you demand are
those things you are able
and willing to buy
7
What is the difference
between money income
and real income?
Your money income increases
with a pay raise, but your real
income increases only if your
pay increases more than inflation
8
P
Shift in Demand
D2
D1
Q
9
What can cause a
shift in demand? A
change in
 incomes
 tastes
 number of consumers
 prices of related goods
 expectations
10
What are tastes?
A consumer’s preferences
for different goods and
services
11
What is utility?
Represents the level
of satisfaction that a
consumer derives
from consumption
12
What is total utility?
The total
satisfaction a
consumer derives
from consumption
13
What is
marginal utility?
The change in total utility
derived from a one-unit
change in consumption
of a good
14
What is the law of
diminishing marginal utility?
The more of a good
consumed per period, the
smaller the increase in
total utility from consuming
one more unit
15
Utility Derived from Drinking
Water after Jogging Four Miles
Units of Water Total Utility Marginal Utility
Exhibit 1
0
0
0
1
40
40
2
60
20
3
70
10
4
75
5
5
73
-2
16
Total Utility
(a) Total Utility and You Derive from
Drinking Water after Jogging Four Miles
60
40
20
0
Exhibit 2
1
2
3
Glasses (8-ounce)
4
5
17
Marginal Utility
(b) Marginal Utility You Derive from
Drinking Water after Jogging Four Miles
60
40
20
0
Exhibit 2
1
2
3
Glasses (8-ounce)
4
5
18
Total and Marginal Utility from Food
Marginal Utility
Units of
Marginal
of Food per
Food
Consumed Total Utility Utility of Dollar Expended
Food
(price = $4)
per Period of Food
0
1
2
3
4
5
6
0
25
41
53
62
68
72
25
16
12
9
6
4
6¼
4
3
2¼
1½
1
19
Total and Marginal Utility from Clothing
Units of
Marginal Utility
Clothing
Marginal of Clothing per
Consumed Total Utility Utility of Dollar Expended
per Period of Clothing Clothing
(price = $2)
0
1
2
3
4
5
0
20
34
44
50
54
20
14
10
6
4
10
7
5
3
2
20
What is
consumer equilibrium?
The condition in which an
individual consumer’s
budget is completely spent
and utility is maximized
21
If you are hungry, how
much food will you eat?
Up to the point where
MU = P
22
Why?
Because if MU> P, you
will buy more food.
If MU< P, you will not buy
the last unit of food
23
When is your total
utility maximized?
When your budget is
completely spent and
the last dollar spent on
each good yields the
same marginal utility
24
Why does MU = P
explain the
downward sloping
demand curve?
25
Demand for Pizza Generated
from Marginal Utility
MU = $4
a
$4
MU = $3
b
$3
$2
0
D
1
2
3
4
26
What is
marginal valuation?
The dollar value of the
marginal utility derived
from consuming each
additional unit of a good
27
What is
consumer surplus?
The difference between
the maximum amount a
consumer is willing to
pay and what the
consumer actually pays
28
What is the consumer
surplus of buying a pizza?
The value of the total
utility you receive from
consuming the pizza
minus your total
spending on the pizza.
29
Price per pizza
Consumer
Surplus
$7
$6
Price of pizza equals $3
$5
$4
$3
D
$2
$1
1
2
3
4
5
30
Consumer Surplus
P
D
Q
31
$6
$4
$2
dA
Price per pizza
Price per pizza
(a) Consumer A
(b) Consumer B
$6
$4
$2
2 4 6
2 4 6
Exhibit 7
(c) Consumer C
$6
dC
$2
Price per pizza
Price per pizza
Pizzas per month
$4
dB
Pizzas per month
(d) Market Demand
$6
$4
dA+dB+dC
D
$2
2 4 6
2 4 6
Pizzas per month
Pizzas per month
32
Market Demand &
Consumer Surplus
Price per pizza
$7
$6
Price of pizza equals $3
$5
$4
D
$3
$2
$1
1
2
3
4
5
6
33
What does time have
to do with MU?
People will have a greater
MU the shorter the time
34
What is an example
of time and MU?
People will be willing to
pay more to fly to
California from Virginia
than they would be
willing to pay to take a
bus to California
35
END
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