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
