Transcript 中国服务贸易现状及问题分析 国际经济与贸易专业 J07021415 施萍萍

Chapter 5
Consumer choices
The Benefit Side of Demand
Recall: The Law of Demand
People do less of what they want to do
as the cost of doing it rises
 The benefit of an activity equals the
highest price we’d be willing to pay to
pursue it (i.e., the reservation price).
 As the cost of an activity rises and
exceeds the reservation price, less of
the activity will be pursued.

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The difference among needs, wants and
demand

Needs: minimum requirement to stay alive
 Wants:
–
–
–
–

“tastes” or “preferences”
quality of life
living standard
satisfaction
Demand:
– Willingness
– Ability
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Translating Wants into Demand

Measuring Wants: The Concept of Utility
– Utility
• The satisfaction people derive from their
consumption activities
– Assumption
• People allocate their income to maximize their
satisfaction or total utility
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Utility

Total utility:
– Total satisfaction from consuming a certain
amount of goods and services

Average utility:
– Average satisfaction from consuming each unit of
goods and services
– AU = TU / Q

Marginal utility:
– Additional utility from consuming one additional
unit of goods and services
– MU = change in TU / change in Q
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Example:
Q
TU
AU
0
0
/
1
50
50
2
90
45
3
120
40
4
140
35
5
150
30
6
140
23
MU
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Sarah’s Total Utility from
Ice Cream Consumption
Figure 5.2, p.130
Based on table 5.1,
p.129
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Diminishing Marginal Utility
Figure 5.3, p. 131
Based on Table 5.2, p.130
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Key Points

TU first increases then max out and starts to
decrease

TU increases at a slower pace

TU is maximized when MU=0

MU is decreasing but positive when TU is increasing

MU is decreasing and negative when TU is
decreasing

MU = 0 when TU is maximized
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Decision Rule
 The
goal: max TU
 Decision rule:
– Increase Q as long as MU > 0
– consume up to Q when MU = 0
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In the example
 Did
not consider cost
 One product: no trade-off
introduce cost
include other products
--to represent consumption bundle
--to show trade-off
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Translating Wants into Demand

The Law of Diminishing Marginal Utility
– The tendency for the additional utility
gained from consuming an additional unit
of a good to diminish as consumption
increases beyond some point
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Translating Wants into Demand

Allocating a fixed income between two goods
– Assume
•
•
•
•
•

Two goods: Chocolate and vanilla ice cream
Price of chocolate equals $2/pint
Price of vanilla equals $1/pint
Sarah’s budget = $400/yr
Currently Sarah is consuming 200 pints of vanilla and
100 pints of chocolate
Question
– Is Sarah maximizing her total utility?
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Marginal Utility Curves for
Two Flavors of Ice Cream (II)
Figure 5.5, p. 133
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Translating Wants into Demand

At 200 vanilla and 100 chocolate
– Marginal utility vanilla/P
• $12/1 = 12 utils/$
– Marginal utility chocolate/P
• 16/2 = 8 utils/$

MU/P for vanilla not equal to MU/P for chocolate
– MU/P for vanilla higher than MU/P for chocolate
– Increase Q for vanilla to reduce MU for V
– Decrease Q for chocolate to increase MU for Ch
Until MU/P for vanilla = MU/P for chocolate
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Optimal Consumption
Figure 5.6, p.134
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Translating Wants into Demand

The Rational Spending Rule
– Spending should be allocated across
goods so that the marginal utility per dollar
is the same for each good.
MUC MUV

PC
PV
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Translating Wants into Demand

The Rational Spending Rule
– How is the rational spending rule related to
the cost-benefit principle?
– How should Sarah respond to a reduction
in the price of chocolate ice cream?
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Translating Wants into Demand

Assume
– Budget = $400
– PC = $2 & PV = $1
– QC = 75 & QV = 250
MUC 20 MUV 10



PC
2
PV
1
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Translating Wants into Demand

Assume
– Price of chocolate falls to $1
MUC 20 MUV 10



PC
1
PV
1
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