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Consumer choice. Utility film. level of happiness or satisfaction associated with alternative choices a term referring to the satisfaction received by a consumer from consuming a good or service utility maximization - PowerPoint PPT Presentation
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Consumer choice
level of happiness or satisfaction associated with alternative choices
a term referring to the satisfaction received by a consumer from consuming a good or service
utility maximization◦ The doctrine of utilitarianism saw the maximization
of utility as a criterion for the organization of society. According to utilitarians, such as Jeremy Bentham (1748–1832) and John Stuart Mill (1806–1873), society should aim to maximize the total utility of individuals, aiming for "the greatest happiness for the greatest number of people".
Utilityfilm
total utility (TU) - the level of happiness derived from consuming the good
marginal utility (MU) - the additional utility that is received when an additional unit of a good is consumed
Total and marginal utility
Marginal utility (MU)
0 0
1 70
2 110
3 130
4 140
5 145
6 140
-
70
40
20
10
5
-5
# of bananas total utility marginal utility
law of diminishing marginal utility - marginal utility declines as more of a particular good is consumed in a given time period, ceteris paribus
even though marginal utility declines, total utility still increases as long as marginal utility is positive. Total utility will decline only if marginal utility is negative.
Law of diminishing MU (Gossen's First Law)
As noted by Adam Smith, water is essential for life and has a low market price (often a price of zero) while diamonds are not as essential yet have a very high market price.
Smith’s explanation: “value in use” vs. “value in exchange”
Diamond-water paradoxfilm, film2
MU of water and diamonds
TU of water and diamonds
value in use = total utility value in exchange is related to marginal
utility
Value in use and value in exchange
Consumer equilibrium
1.
2. All income is spent.
The first condition listed above is sometimes referred to as the "equimarginal principle."
Individuals buy an item only if they receive a net gain from the purchase (i.e., total benefit exceeds opportunity cost).
This net gain is called “consumer surplus.”
Consumer surplus
Suppose that an individual buys 10 units of a good when the price is $5
Example
Benefits and cost of first unit
• Benefit = blue + green rectangles (=$9)
• Cost = green rectangle (=$5)• Consumer surplus = blue rectangle
(=$4)
Total benefit to consumer
Total cost to consumer
Consumer surplus
Indifference curve – a graph of all of the combinations of goods that provide a given level of utility
Any two points on an indifference curve provide the same level of utility
Indifference curves
Points on and off an indifference curve
Alternative levels of utility
Budget constraintfilm film2
Optimal consumption bundle
• the point on the budget line that maximizes a consumer's total utility• the tangency of the budget line and an indifference curve
y
y
x
x
PMU
PMU
www.oswego.edu/~kane/eco101.htm Czarny B. Podstawy ekonomii en.wikipedia.org/wiki/Utility
Bibliography