Chapter 8: Utility and Demand (Consumption choices (The choices you make…
Chapter 8: Utility and Demand
Predictions of Marginal Utility Theory
A fall in the price of a movie:
When the price of a good falls the quantity demanded of that good increases—the demand curve slopes downward.
Predictions of Marginal Utility Theory:
A change in the price of one good changes the demand for another good.
A Rise in Income
When income increases, the demand for a normal good increases.
Given the prices of movies and pop, when Lisa’s income increases from $40 to $56 a month, she buys more movies and more pop.
Movies and pop are normal goods. Table 8.5 shows these predictions
The choices you make as a buyer of goods and services is influenced by many factors, which economists summarize as ♣ Consumption possibilities ♣ Preferences
Consumption Possibilities are all the things that you can afford to buy
A Consumer’s Budget Line: Consumption possibilities are limited by income, the price of a movie, and the price of pop. When Lisa spends all of her income, she reaches the limits of her consumption possibilities. Lisa’s budget line shows the limits of her consumption possibilities.
Preferences: The choice that Lisa makes depends on her preferences—her likes and dislikes.
Her benefit or satisfaction from consuming a good or service is called utility.
Budget line is downward sloping because income is limited.
A point inside the budget line A (affordable, and you’re saving), point B on the budget line is (affordable but no income left), Point C is outside of the budget line, it’s unaffordable. (points ABC consumption bundles)
benefit or satisfaction from consuming a good or service
the total benefit a person gets from the consumption of goods
more consumption gives more total utility.
Total utility from a good increases as the quantity of the good increases
the change in total utility that results from a unit-increase in the quantity of the good consumed.
As the quantity consumed of a good increases, the marginal utility from it decreases.
diminishing: the decrease in marginal utility as the quantity of the good consumed increases the principle
Marginal utility from a good decreases as the quantity of the good increases.
choosing at the margin
marginal utility per dollar
Spend all the available income.
Equalize the marginal utility per dollar for all
The power of marginal analysis
Find the total utility for each just affordable combination
find the total utility for each just-affordable combination