bec doms ppt on consumer choice
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Bec doms ppt on consumer choiceTRANSCRIPT
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Consumer Choice
Utility Consumer surplus Budget Constraints Indifference Curves
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I. Utility Analysis
what is utility? benefit you get from consuming a good determined by your tastes/preferences
(assume these are stable)
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total utility (TU)
total benefit from consuming good example
total benefit from 3 cookies
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TU increases as consumption increases, to a point
<TU 2 cookies TU 3 cookies
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marginal utility (MU)
change in TU from
consuming one more of a good example
how much MORE utility from
an additional pack of gum?
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change in TU from0 to 1 cookie
change in TU from1 cookie to 2 cookies
MU of 1st cookie
MU of 2nd cookie
=
=
0
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diminishing marginal utility
MU falls as consumption rises get sick of cookies
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MU of 1st cookie
> MU of 2nd cookie
0
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TU
cookie
TU rises at slower and slower rate
as MU declines
MU
cookie
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How to maximize TU?
use available budget equalize MU/$ across goods Huh?
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chose combination of cookies and milk where
price of cookies price of milk
MU cookies=
MU milk
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why?
chose combo of 6 cookies, 1 milk suppose MU/$1 of cookies = 4,
MU/$1 of milk = 15 by consuming fewer cookies, more milk…
I would add more to my TU
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TU vs. MU
Diamond-Water paradox $10,000
one carat diamond 5 million gallons of tap water
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why?
TU of water is greater than TU of diamonds water is essential for life
BUT water is abundant, diamonds are rarer MU of last diamond is higher
MU determines value
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MU and demand
MU declines as consumption rises willing to pay less for each additional unit
downward sloping demand
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example : pizzaP
Q
D
$10
4 pizzas
for 4th pizzawilling to pay $10
for 2nd pizza$15
2 pizza
willing to pay $15
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II. Consumer Surplus
difference between what you pay for a good,
any what you are WILLING to pay for a good
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example
market price pizza = $10 my marginal value of 3rd pizza this
week = $12 my consumer surplus = $2
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P
Q
D
$10
my demand curve
$12
3
my consumer surplus
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P
Q
D
$10
10,000
total consumer surplus
area between Dand price of pizza
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III. The Budget Line
given: consumer’s budget prices
draw a line representing choices consumption possibilities
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example
2 goods: milk & cookies bottle of milk = $1 cookie = $.50 daily budget = $4
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possible combinations
cookies milk
02468
43210
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budget line
milk
cookies
8
4
2
6
0421 3
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budget line
milk
cookies
8
4
2
6
0421 3
Affordable
Unaffordable
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what if prices change?
changes slope of budget line suppose cookies = $1
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budget line
milk
cookies
8
4
2
6
0421 3
cookie = $.50
cookie = $1
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what if budget changes
budget line shifts suppose budget = $5
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milk
cookies
budget = $4
budget = $58
4
2
6
0
10
421 3 5
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IV. Indifference Curves
(appendix) alternative way to show utility curve shows combo of goods
that deliver same total utility
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example: milk and cookies
milk
8
4
2
6
0421 3
cookies
Indifference curve
Every point on curve has same total utility
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TU is higher as curve shifts right
milk
cookies
higher TU
lower TU
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consumer equilibrium
maximize TU stay on budget
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consumer equilibriumcookies
8
milk4
4
2
best affordable point
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consumer equilibriumcookies
8
milk4
4
2
best affordable point
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sum it up
consumer decisions based on preferences budget constraint
consumer decisions made at the margin marginal benefit of one more compared to price of one more