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Chapter 6 Consumer Choice & Demand

Chapter 6 Consumer Choice & Demand. These slides supplement the textbook, but should not replace reading the textbook. In our analysis of consumer choice, what important assumption do we make?. People would rather have more than less. What is a demand curve?.

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Chapter 6 Consumer Choice & Demand

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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. Demand Curve P1 P2 D Q2 Q1

  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 P D2 D1 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. Represents the level of satisfaction that a consumer derives from consumption • What is utility?

  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 -2 Exhibit 1

  17. (a) Total Utility and You Derive from Drinking Water after Jogging Four Miles 60 40 Total Utility 20 0 5 1 2 3 4 Glasses (8-ounce) Exhibit 2

  18. (b) Marginal Utility You Derive from Drinking Water after Jogging Four Miles 60 40 Marginal Utility 20 0 5 1 2 3 4 Glasses (8-ounce) Exhibit 2

  19. Total and Marginal Utility from Food Marginal Utility of Food per Dollar Expended (price = $4) -6¼432¼1½1 Units of Food Consumed per Period 0123456 Marginal Utility of Food -251612964 Total Utility of Food 0254153626872

  20. Total and Marginal Utility from Clothing Units of Clothing Consumed per Period 012345 Marginal Utility of Clothing per Dollar Expended (price = $2) -107532 Marginal Utility of Clothing -20141064 Total Utility of Clothing 02034445054

  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. $4 $3 $2 0 1 2 3 4 Demand for Pizza Generated from Marginal Utility MU = $4 a MU = $3 b D

  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. Consumer Surplus $7 $6 Price of pizza equals $3 $5 Price per pizza $4 $3 D $2 $1 1 2 3 4 5

  31. Consumer Surplus P D Q

  32. (b) Consumer B (a) Consumer A $6 $6 $4 $4 Price per pizza Price per pizza dB dA $2 $2 4 4 2 6 2 6 Pizzas per month Pizzas per month Exhibit 7 (c) Consumer C (d) Market Demand $6 $6 dA+dB+dC $4 $4 Price per pizza Price per pizza dC D $2 $2 4 2 6 4 2 6 Pizzas per month Pizzas per month

  33. Market Demand & Consumer Surplus $7 $6 Price of pizza equals $3 $5 Price per pizza $4 D $3 $2 $1 1 2 3 4 5 6

  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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