VIEWS: 9 PAGES: 11 POSTED ON: 5/15/2012
Questions with the same answer • Why do NBA owners want NBA players to take a pay cut? • Why do rich people want lower taxes? • Why does Mitt Romney want to be President? • Why does Barack Obama want to stay President? • Why are you attending SUU? Consumer Theory: Summarized • People buy what they want with what they have. • People make decisions according to the dictates of cost-benefit analysis where the cost of buying a product is its price and the benefit is the utility a person derives from the products consumption. Utility • Utility - a measure of the satisfaction (happiness, benefit) that results from the consumption of a good. • Total Utility- The total satisfaction a person receives from consuming a product. • Marginal Utility- The utility a person receives from consuming an additional unit of a good. Gossen’s First Law • Hermann Gossen (1810-1858) • http://homepage.newschool.edu/~het/p rofiles/gossen.htm • Development of the Laws of Human Relationships, 1854 • Gossen’s First Law: The principle of diminishing marginal utility. • The Law of Diminishing Marginal Utility - The marginal utility gained by consuming equal successive units of a good will decline as the amount consumed increases. Gossen’s Second Law • Consumers will maximize their total utility by purchasing so that the last unit of money spend for any one good gives the same marginal utility as the last unit spent for any other. MU1/P1 = MU2/P2 = ......... = MUn/Pn Marginal Utility and the Law of Demand • What happens as price of a good rises? • The amount of utility received per dollar spent declines, therefore people reduce their consumption of the good and consumes more of other commodities. The Diamond-Water Paradox • Adam Smith noted that diamonds, who have little value in use, had a greater value than water, an element that is essential to life. Why should values not correspond to usefulness? • Although water provides more total utility than diamonds, it is marginal utility that dictates value. • Why do diamonds have greater marginal utility than water? Because diamonds are relatively scarce. The Distribution of Income and Interpersonal Utility Comparisons • Jeremy Bentham (1748-1832) and the utilitarians • http://homepage.newschool.edu/~het/profil es/bentham.htm • Bentham offered the following argument for an equal distribution of income: • The diminishing marginal utility of income suggests that an equal distribution of income would maximize social welfare. Problems with Bentham’s View 1. FROM BENTHAM: Equality diminishes incentives, thus diminishing long-run social welfare. Hence the distribution of income should be more equal, but not perfectly equal. 2. Interpersonal utility comparison - comparing the utility one person receives from a good with the utility another person receives from the same good. • We cannot empirically measure utility. As a person accumulates more income we can expect marginal utility of each dollar to decline. However, we do not know the starting point. So it may not be the case that the marginal utility of an additional dollar for a rich person is necessarily lower than the marginal utility of an additional dollar for a poor person. Why do individuals and nations trade? • Each time a trade takes place, an apparent contradiction is expressed. • The buyer says the good is worth more than the money spent. The sellers says the money paid is worth more than the good. • How can this be explained? Diminishing Marginal Utility • Be able to explain this argument. Consumer Theory: Summarized • Consumer theory gives us the theoretical foundation for the demand curve, which is critical to our understanding of the firm. • Consumer theory allows us to see why individuals and nations trade. • Consumer theory solves the diamond-water paradox.
Pages to are hidden for
"Utility"Please download to view full document