Economics for Today 2nd edition Irvin B. Tucker by M0Cl9l

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									Poverty is anomaly to rich
people; it is very difficult
to make out why people
who want dinner do not
ring the bell. –Walter Bagehot

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Consumer Choice Theory
Poverty is anomaly to rich
people; it is very difficult
to make out why people
who want dinner do not
ring the bell. –Walter Bagehot



                                 2
     Consumption Possibilities             W$1   G.50c
                                   A       0        8
                                   B       1        6
                 UNAFFORDABLE
8        A                         C       2        4
                                   D       3        2
                    B              E       4        0
 6                                               Rate of exchange
                               C                 opportunity cost
4                                                slope = rise / run
                                                         gum / water
           AFFORDABLE
 2                                         D             2/1 =2
                                                 trade off is 1 w
Gum                                              2G


                1          2           3         E4
                                                                    3
                                                        Water
    x       y budget/income
$1 (2) + $0.50 (4) = $4
consumption possibilities
(A) $1 (0) + $0.50 (8) = $4
(B) $1 (1) + $0.50 (6) = $4
(C) $1 (2) + $0.50 (4) = $4
(D) $1 (3) + $0.50 (2) = $4
(E) $1 (4) + $0.50 (0) = $4
Opportunity cost 1 water 2 gum   4
     Consumption Possibilities                            W$1 G.50c
          Price increase                         A        0         8
                             W$2 G.50c           B        1         6
                 UNAFFORDABLE
8         A              A   0      8            C        2         4
                            C        1       4   D        3          2
                                                 E        4         0
 6                  B       E        2       0
                                                     Rate of exchange
                                                     opportunity cost
4           C                    C                   slope = rise / run
                                                              gum / water
 2                                       D                    2/1 =4
                                                     trade off is 1 W
Gum
                                                     4G
                        E                             E
                1           2            3           4
                                                                     5
                                                          Water
    x       y budget/income
$1 (2) + $0.50 (4) = $4
Price increase of water $1
Price of Gum 0.50c
$1 to $2
consumption possibilities(rate of
   exchange 1 w give up 4 gum
(A) $2 (0) + $0.50 (8) = $4(Budget)
(C) $2 (1) + $0.50 (4) = $4
(E) $2 (2) + $0.50 (0) = $4
                                      6
     Consumption Possibilities
          Price decrease                 W   C
                                 A       0   8
                 UNAFFORDABLE
8                                B       2   6
                                 C       4   4
                                 D       6   2
 6                  B            E       8   0


4
 2                                   C
Gum

                2          4         6       8
                                                         7
                                                 Water
     What is Util?

A hypothetical unit used
 to measure how much
 utility a person obtains
 from consuming a good
                            8
    What is Utility?
The satisfaction, or
 pleasure, that people
 receive from consuming
 a good or service

                          9
What is Total Utility?
The amount of satisfaction
 received from all the units
 of a good or service
 consumed


                          10
 Why does a consumer
buy one bundle of goods,
 rather than another?
   Consumers make one
    choice over another
    depending on their
    marginal utility
                          11
 What is Marginal
    Utility?
It is the change in total
  utility (satisfaction, or
  pleasure), that people
  receive from consuming
  one additional unit of a
  good or service
                              12
   What is the Law of
  Diminishing Marginal
        Utility?
The principle that the
 extra satisfaction of a
 good or service declines
 as people consume more
 in a given period
                            13
Quantity   satisfaction    total
  Q         utili         utility
  0              0        0
  1             90        90 (0+90)
  2             70        160 (90+70)
  3             60        220 (160+60)
  4             40        260 (220+40)
  5             20        280 (260+20))
  6              0        280 (280 + 0)
  7           -10         270 (280) + (-10)
                                              14
Quantity   total     marginal utility is
           utility   change in total utility for every
0            0        additional 1 Q consumed
1           90       90 (90-0)
2           160      70 (160-90)
2           220      60 (220-160)
3           260      40 (260-220)
4           280      20 (280-260)
5           280      0 (280-280)
6           270      –10 (270 –280)
                                                     15
Lemonade Total        Utility
270
                                 250 250
240                       230               240
210
180
                   190
150
120
            130
90    90
      1 2 3 4 5 6 7 8 9
                                                    Q
B                                                   16
                                                         F
 Lemonade  Marginal
        Utility


100
      90
80
             70
60                  60
40                         40
20                                20
 0              0                      Q
      1 2 3 4 5 6 7 8 9
  B                -10                 17
 Practice questions 1

• When TU … MU is
•+
• When MU=0 … TU =
• MAX
                        18
 Practice questions 2

• When MU- … TU is
• decreasing
• When MU=+ … TU =
• increasing
                        19
 Practice questions 3
• MU is also defined as …
• How much you are
  willing to pay
• MU - = …
• How much you have to
  paid to consume a good
                        20
 Practice questions 4
• Goods with MU –
• Work
• Pollution
• Garbage
• Nuclear waste
                        21
   Practice questions 5
• Application questions
• News paper/Sunday vs. daily
• All you can eat breakfast
  buffer
• Medical experiments
• If you claim that you have
  over studied for an
  exam…MU
• NEGATIVE                  22
 Practice questions 6
• Many students feel that
  many lectures form
  instructors are waste of
  time …. MU
• Negative

                             23
 Practice questions 7
• All you can eat pizza
  party
• You eat 10   th slice ..MU
  …. And your total utility
• + positive and your total
  utility is increasing
                               24
 Practice questions 8
• All you can eat pizza
  party
• You feel sick after eating
  several slices ..MU ….
  And your total utility
• - positive and your total
  utility is decreasing
                           25
 Practice questions 9
• All you can eat pizza party
• You walk out and do not eat
  additional pizza slices your
  ..MU of additional slice of
  pizza …. And your total
  utility is
• Zero and your total utility is
  maximum                          26
    The Power of Marginal
 If the marginal utility per dollar
  spent on water exceeds the
  marginal utility p[er dollar spent
  on gum, buy more water and
  less.
 If the marginal utility per dollar
  spent on gum exceeds the
  marginal utility per dollar spent
  on water, buy more gum and less
  water.                               27
Even though water provides a greater
   utility than diamonds, why are
 diamonds more expensive? Water
           diamond paradox

Water is plentiful in most
 of the world, so its
 marginal utility is low.
 Diamond is scarce,
 marginal utility is high.
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                       Rational Choices in Beverage
                       Markets
The figure shows
some trends in the
consumption of
beverages in the
United States during
the 1990s.



The quantities of bottled water and
soda consumed have increased.
The quantities of coffee and beer
                                                      29
consumed have decreased.
                       Jeremy Bentham,
                         William Stanley
                    Jevons, and the Birth
Jeremy Bentham proposed the of Utility
concept of utility in the early 1800s. He
used the idea to advance his then
radical support for free education, free
medical care, and social security.


Fifty years later, William Stanley Jevons
developed the concept of marginal
utility. He used it to predict people’s
consumption choices.
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We will not be doing the
       appendix


                       31

								
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