Chapter 8

What is the elasticity supply of diamonds ? How does this effect quantity and surplus?

The supply of diamonds is perfectly inelastic, so the price is high and the consumer surplus from diamonds is small

consumer equilibrium

The utility-maximizing combination

What is the elasticity supply of water? How does this effect quantity and surplus?

Water is perfectly elastic, so the quantity of water consumed is large and the consumer surplus from water is large

Utility-Maximizing Choice

We can find the utility-maximizing choice by looking at the total utility that arises from each affordable combination

Total utility

the total benefit a person gets from the consumption of goods. Generally, more consumption gives more utility.

Preferences

A household's preferences determine the benefits or satisfaction a person receives consuming a good or service

How is the paradox of value "Why is water, which is essential to life, far cheaper than diamonds, which are not essential?" resolved?

By distinguishing between total utility and marginal utility. We use so much water that the marginal utility from water consumed is small, but the total utility is large

Total utility is maximized when

MU of Good 1 = MU Good 2

What is utility similar to & why?

Similar to temperature because both are abstract concepts, and both have units of measurement that are arbitrary

A consumer's total utility is maximized by following the rule

Spend all available income & equalize the marginal utility per dollar for all goods.

the principle of diminishing marginal utility

decrease in marginal utility as the quantity of the good consumed increases

We buy few diamonds, so the marginal utility from diamonds is

large, but the total utility is small

What is the key assumption of marginal utility theory?

that the household chooses the consumption possibility that maximizes total utility

Marginal Utility

the change in total utility that results from a one-unit increase in the quantity of a good consumed

The concept of utility helps us make predictions about consumption choices in much the same way that

the concept of temperature enables us to predict when water will turn to ice or steam

marginal utility per dollar

the marginal utility from a good divided by its price

As the quantity consumed of a good increases

the marginal utility from consuming it decreases

Marginal utility from a good decreases as

the quantity of the good increases

Total utility from a good increases as

the quantity of the good increases