Chapter 8: Utility and Demand
A consumer's total utility is maximized by following the rule:
-Spend all the available income -Equalize the marginal utility per dollar for all goods.
There are 2 utility concepts:
-Total Utility -Marginal Utility
Value and Consumer Surplus
-Water is cheap but brings a large consumer surplus. -Diamonds are expensive but brings a small consumer surplus.
Marginal Analysis
Comparing the marginal gain from having more of one good with the marginal loss from having less of another good to find a customer's utility maximizing choice.
The fall in the price of a good...
Decreases a customer's demand for it so the demand curve shifts leftward.
When income rises...
Demand curves shift rightward - the customer's demand for both goods increase.
The paradox of value is resolved by...
Distinguishing between total utility and marginal utility. -Ex: Water and Diamonds
Utility-maximizing choices
Generate a downward sloping demand curve.
Bounded Self-Interest
The limited self-interest that results in sometimes suppressing our own interests to help others.
Marginal Utility Per Dollar
The marginal utility from a good that results from spending one more dollar on it.
Neuroeconomics
The study of the activity of the human brain when a person makes an economic decision.
Principle of Diminishing Marginal Utility
The tendency for marginal utility to decrease as the consumption of a good increases. -Marginal utility diminishes as a consumer buys more of each good.
The Endowment Effect
The tendency for people to value something more highly simply because they own it.
Total Utility
The total benefit that a person gets from the consumption of all the different goods and services. -Total utility depends on the level of consumption - more consumption generally gives more total utility.
Preferences
A description of a customer's likes and dislikes.
Consumer Equilibrium
A situation in which a consumer has allocated all of his or her available income in the way that maximizes his or her total utility, given the prices of goods and services.
Consumption Possibilities
All the things that you can afford to buy.
A change in price...
Changes the slope of the line.
Marginal Utility Theory
-Predicts the law of demand. -Predicts that a fall in the price of a substitute of a good decreases the demand for the good and that for a normal good, a rise in income increases demand.
A fall in the price of a movie
-Change in the quantity demanded -Change in demand
Consumption choices are influenced by:
-Consumption Possibilities -Preferences
Bounded Willpower
The less-than-perfect willpower that prevents us from making a decision that we know, at the time of implementing the decision, we will later regret.
Consumptions possibilities change when...
Income or prices change
Budget Line
Marks the boundary between those combinations of goods and services that a household can afford to buy and those that it cannot afford. -The budget line constrains choices: It marks the boundary between what is affordable and what is not affordable. -You can afford all the points on the budget line and inside it. -Points outside the budget line are unaffordable.
Bounded Rationality
Rationality that is limited by the computing power of the human brain.
A rise in income...
Shifts the budget line outward but leaves its slope unchanged.
Behavioral Economics
Studies the ways in which limits on the human brain's ability to computer and implement rational decisions influences economic behavior - both the decisions that people make and the consequences of those decisions for the way markets work. -Looks for choices that do not seem to be rational.
Utility
The benefit or satisfaction that a person gets from the consumption of goods and services.
Marginal Utility
The change in total utility that results from a one-unit increase in the quantity of a good consumed. -Marginal utility is positive, but it diminishes as the quantity of a good consumed increases.
Consumption Choices
The choices that you make as a buyer of goods and services.
