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

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• pg 1
```									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

1
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
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
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
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What is Utility?
The satisfaction, or
pleasure, that people
a good or service

9
What is Total Utility?
The amount of satisfaction
of a good or service
consumed

10
Why does a consumer
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
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
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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)
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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)
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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
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
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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
• + positive and your total
utility is increasing
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Practice questions 8
• All you can eat pizza
party
• You feel sick after eating
several slices ..MU ….
• - positive and your total
utility is decreasing
25
Practice questions 9
• All you can eat pizza party
• You walk out and do not eat
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

Water is plentiful in most
of the world, so its
marginal utility is low.
Diamond is scarce,
marginal utility is high.
28
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
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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
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

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