1 chapter 6 consumer choice & demand these slides supplement the textbook, but should not...
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1
Chapter 6Consumer Choice & Demand
These slides supplement the textbook, but should not replace reading the textbook
2
In our analysis of consumer choice, what
important assumption do we make?
People would rather have more than less
3
What is ademand curve?
A demand curve shows how many units will be demanded at various prices
4
Why do demand curves slope downward
to the right? Because there will be an change in the quantity demanded as price changes
5
With a change in price, what about other things?
When price changes we assume that everything else stays the same
6
D
P1
Q1
P2
Q2
Demand Curve
7
What is the difference between
wants and demand? We live in a world of unlimited wants - but the things that you demand are those things you are able and willing to buy
8
What is the difference between money income
and real income? Your money income increases with a pay raise, but your real income increases only if your pay increases more than inflation
9
Shift in Demand
D1
D2
P
Q
10
What can cause a shift in demand? A
change in incomes tastes number of consumers prices of related goods expectations
11
What are tastes?A consumer’s preferences for different goods and services
12
What is utility? Represents the level of satisfaction that a consumer derives from consumption
13
What is total utility?The total satisfaction a consumer derives from consumption
14
What ismarginal utility?
The change in total utility derived from a one-unit change in consumption of a good
15
What is the law ofdiminishing marginal utility?
The more of a good consumed per period, the smaller the increase in total utility from consuming one more unit
16
Utility Derived from Drinking Water after Jogging Four Miles
Units of Water
0
1
2
3
4
5
Total Utility
0
40
60
70
75
73
Marginal Utility
0
40
20
10
5
-2Exhibit 1
17
(a) Total Utility and You Derive from Drinking Water after Jogging Four Miles
60
40
20
0 1 2 3 4 5
Tot
al U
tili
ty
Glasses (8-ounce)Exhibit 2
18
(b) Marginal Utility You Derive from Drinking Water after Jogging Four Miles
60
40
20
0 1 2 3 4 5
Mar
gin
al U
tili
ty
Glasses (8-ounce)Exhibit 2
19
Total and Marginal Utility from Food Units of
Food Consumed per Period
0123456
Total Utility of Food
0254153626872
Marginal Utility of
Food
-251612964
Marginal Utility of Food per
Dollar Expended (price = $4)
-6¼43
2¼1½1
20
Total and Marginal Utility from Clothing
Units of Clothing
Consumed per Period
012345
Total Utility of Clothing
02034445054
Marginal Utility of Clothing
-20141064
Marginal Utility of Clothing per
Dollar Expended (price = $2)
-107532
21
What is consumer equilibrium?The condition in which an individual consumer’s budget is completely spent and utility is maximized
22
If you are hungry, how much food will you eat?
Up to the point where
MU = P
23
Why?Because if MU> P, you will buy more food.
If MU< P, you will not buy the last unit of food
24
When is your total utility maximized?
When your budget is completely spent and the last dollar spent on each good yields the same marginal utility
25
Why does MU = P explain the
downward sloping demand curve?
26
a
b
D
$4
$3
$2
04321
Demand for Pizza Generated from Marginal Utility
MU = $4
MU = $3
27
What is marginal valuation?The dollar value of the marginal utility derived from consuming each additional unit of a good
28
What is consumer surplus?
The difference between the maximum amount a consumer is willing to pay and what the consumer actually pays
29
What is the consumer surplus of buying a pizza?
The value of the total utility you receive from consuming the pizza minus your total spending on the pizza.
30
D
Consumer Surplus$7
$6
$5
$4
$3
$2
$1
1 2 3 4 5
Pri
ce p
er p
izza Price of pizza equals $3
31
Consumer Surplus
P
Q
D
32
$6
$4
$2
2 4 6
dA
Pri
ce p
er p
izza
Pizzas per month
(a) Consumer A
$6
$4
$2
2 4 6
dB
Pri
ce p
er p
izza
Pizzas per month
(b) Consumer B
$6
$4
$2
2 4 6
dC
Pri
ce p
er p
izza
Pizzas per month
(c) Consumer C
D
$6
$4
$2
2 4 6
dA+dB+dC
Pri
ce p
er p
izza
Pizzas per month
(d) Market Demand
Exhibit 7
33
D
Market Demand & Consumer Surplus
$7
$6
$5
$4
$3
$2
$1
1 2 3 4 5 6
Pri
ce p
er p
izza Price of pizza equals $3
34
What does time have to do with MU?
People will have a greater MU the shorter the time
35
What is an example of time and MU?
People will be willing to pay more to fly to California from Virginia than they would be willing to pay to take a bus to California
36
END
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