Transcript Chap 21 Consumer Behavior &Utility Maximization

Chap 21
Consumer Behavior
&
Utility Maximization
By: Anabel Gonzalez
&
Amanda Reina
A Closer Look
at the Law of Demand


Income Effect: Lower the price of a product,
the more a consumer can buy of that
product
Substitution Effect: Impact that a change in
a product’s price has on its relative
expensiveness and consequently on the
quantity demanded.
Law of Diminishing
Marginal Utility


Although consumer wants in general may be
insatiable, wants for particular commodities can
be satisfied.
Utility: Want-satisfying power



Not equal to Usefulness
Vary widely from person to person
Subjective and difficult to quantify (assume people can
measure satisfaction with units called utils, units of utility)
Total Utility
and Marginal Utility


Total Utility (TU): total amount of
satisfaction or pleasure a person derives
from consuming some specific quantity of a
good or service.
Marginal Utility (MU): extra satisfaction a
consumer gets from an additional unit of
that same product.
Marginal Utility, Demand and
Elasticity



Consumer will rather spend additional
dollars on products that provide more (or
equal) utility, nor less.
If MU of extra units drops off so rapidly
demand is inelastic.
If MU of extra units drops off modestly
demand is elastic.
Theory of Consumer
Behavior

How do consumers distribute their money
incomes among the many goods and
services available for purchase?

The consumer will choose the goods and
services that they find most satisfying/useful.
Consumer Choice &
Budget Constraint

A typical consumer:



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Rational Behavior
Preferences
Budget constraint
Prices
Consumer Choice &
Budget Constraint

Rational Behavior:

Consumer tries to derive the greatest amount of
satisfaction, or utility.


“The most for their money”
Preferences:

Clear inclination for certain goods and services
available in the market.
Consumer Choice &
Budget Constraint

Budget constraint:


Consumers have a fixed income
Prices:


Goods are scarce in relation to the demand for
them; therefore, every good carries a price tag
Consumer has limited number of dollars, so they
can only buy a limited amount of goods.
Utility-Maximizing Rule

To maximize satisfaction, the consumer
should distribute his/her money income so
that the last dollar spent on each product
yields the same amount of extra (marginal)
utility.
$5
$1
Algebraic Restatement

MU of product A
Price of A
=
2 Utils
$1
MU product B
Price of B
10 Utils
=
$2
•The last dollar spent on A provides only 2 utils of
satisfaction, while on B it provides 5 utils of satisfaction.
•Consumer can increase satisfaction by buying more of
product B and less of product A.
Utility Maximization &
the Demand Curve
Price per
Unit of B
$2
$1
Price per unit of B
P($)
Quantity
Demanded
4
6
$2
Product price and
quantity demanded
are inversely related!
$1
4
6
Quantity demanded of B