Chapter 8: Utility and Demand

Ace your homework & exams now with Quizwiz!

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.


Related study sets

Chapter 5 Analysis of Financial Statements

View Set

Ch. 27 Anger, Aggression, and Violence

View Set

EMT chapter 6 the human body quiz

View Set

Psychology Sensation and Perception

View Set

Conflict Resolution UNIT 3 - CHALLENGE 3

View Set