Econ Module 8 Part 2: Consumer Optimum
How a Price Change Affects Consumer Optimum
-A change in the price of one good changes the demand for another good. -You've seen that if the price of a movie falls, MUM/PM rises, so before the consumer changes the quantities consumed, MUM/PM > MUP/PP. -To restore consumer equilibrium (maximum total utility) the consumer decreases the quantity of pizza consumed to drive up the MUP and restore MUM/PM = MUP/PP.
How a Price Change Affects Consumer Optimum Real-Income Effect
-The change in people's purchasing power that occurs when, other things being constant, the price of one good that they purchase changes.
Maximizing Utility: Consumer Optimum: The Steps A little math
-The rule of equal marginal utilities per dollar spent •A consumer maximizes personal satisfaction when allocating money income in such a way that the last dollars spent on good A, good B, good C, and so on yield equal amounts of marginal utility
Maximizing Utility: Consumer Optimum: The Rule A little math
-The rule of equal marginal utilities per dollar spent MU of good A/price of good A=MU of good B/price of good B =...= MU of good Z/price of good Z
How a Price Change Affects Consumer Optimum The Substitution Effect
-The tendency of people (consumers & producers) to substitute "cheaper" (MU/P) commodities for more expensive commodities.
Maximizing Utility: Consumer Optimum Equalizing Marginal Utility per Dollar
-Using marginal analysis, a consumer's total utility is maximized by following the rule: -Spend all available income and equalize the marginal utility per dollar for all goods.
consumer equilibrium (optimum)
-Utility-maximizing combination
Maximizing Utility: Consumer Optimum Consumer Efficiency
-When consumers maximize their utility, they are using resources efficiently. -Marginal benefit from a good or service is the maximum price the consumer is willing to pay for an extra unit of that good or service when utility is maximized.
How an Income Change Affects Consumer Optimum An Increase in Income
-When income increases, the demand for a normal good increases. -If income increases to $34, the consumer optimum is now 5 movies and 3 slices of pizza. -This is an increase of both goods.
How a Price Change Affects Consumer Optimum 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. -For example, if the price of a movie falls, we know that MUM/PM rises, so before the consumer changes the quantities consumed, MUM/PM > MUP/PP. -To restore consumer equilibrium (maximum total utility) the consumer increases the quantity of Movies consumed to drive down the MUM and restore MUM/PM = MUP/PP.
Maximizing Utility: Consumer Optimum-The Utility-Maximizing Rule:
Call the marginal utility of movies MUM . Call the marginal utility of pizza MUP . Call the price of movies PM . Call the price of pizza PP . The marginal utility per dollar spent on downloading movies is MUM/PM . The marginal utility per dollar spent on pizza is MUP/PP.
How a Price Change Affects Consumer Optimum Assume the price of a movie falls to $4
Now MUM/PM > MUP/PP Result Buy more movies and MUM falls
How a Price Change Affects Consumer Optimum Assume the price of a movie falls to $4
QM = 4 MUM/PM= 36.5/4= 9.13 QP = 2 MUP/PP= 22/3= 7.3
How a Price Change Affects Consumer Optimum Income = $26
QM = 4 MUM/PM= 36.5/5= 7.3 QP = 2 MUP/PP= 22/3= 7.3
Maximizing Utility: Consumer Optimum Total and Marginal Utility from Consuming Movies and Pizza Slices on an Income of $26
See graphs in module 8 part 2
Maximizing Utility: Consumer Optimum Consumer Optimum
Utility-Maximizing Choice-A choice of a set of goods and services that maximizes utility (level of satisfaction) for each consumer, subject to limited income -We can find the utility-maximizing choice by looking at the total utility that arises from each affordable combination.
The marginal utility per dollar is the:
marginal utility from a good divided by its price.
