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    Consumer Choice Theory

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    KarenMariasusai
    This document discusses key concepts in consumer choice theory, including: 1. Utility, total utility, and marginal utility. Total utility is satisfaction from consumption and marginal utility is the change in satisfaction from consuming one more unit. 2. The law of diminishing marginal utility, which states that marginal utility declines as consumption increases. 3. Consumer equilibrium is reached when the marginal utility per dollar is equal for all goods, maximizing total utility within a budget.

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    Consumer Choice Theory

    Uploaded by

    KarenMariasusai
    24 views21 pages
    This document discusses key concepts in consumer choice theory, including: 1. Utility, total utility, and marginal utility. Total utility is satisfaction from consumption and marginal utility is the change in satisfaction from consuming one more unit. 2. The law of diminishing marginal utility, which states that marginal utility declines as consumption increases. 3. Consumer equilibrium is reached when the marginal utility per dollar is equal for all goods, maximizing total utility within a budget.

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    microeconomics and macroeconomics

    Original Title

    Chapter_2

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    This document discusses key concepts in consumer choice theory, including: 1. Utility, total utility, and marginal utility. Total utility is satisfaction from consumption and marginal utility is the change in satisfaction from consuming one more unit. 2. The law of diminishing marginal utility, which states that marginal utility declines as consumption increases. 3. Consumer equilibrium is reached when the marginal utility per dollar is equal for all goods, maximizing total utility within a budget.

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    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    24 views21 pages

    Consumer Choice Theory

    Uploaded by

    KarenMariasusai
    This document discusses key concepts in consumer choice theory, including: 1. Utility, total utility, and marginal utility. Total utility is satisfaction from consumption and marginal utility is the change in satisfaction from consuming one more unit. 2. The law of diminishing marginal utility, which states that marginal utility declines as consumption increases. 3. Consumer equilibrium is reached when the marginal utility per dollar is equal for all goods, maximizing total utility within a budget.

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    You are on page 1of 21

    Chapter 2

    Consumer Choice
    Theory
    11

    Learning Objectives
    1. Utility, Total Utility and Marginal Utility.
    2. Maximizing Total Utility
    3. Maximizing Total Utility consumer
    equilibrium

    12

    1. Utility, Total Utility and Marginal Utility

    Utility - The satisfaction, or pleasure,


    that people receive from consuming a
    good or service.
    Util - A hypothetical unit used to
    measure how much utility a person
    obtains from consuming a good.

    13

    Utility (satisfaction) is typically measured


    in dollars according to the willingness to
    pay principle.
    What is the most that you are willing to
    pay for that product?

    14

    Total utility The total satisfaction a


    person receives from consuming a
    particular quantity of a good.
    Marginal utility The additional
    utility a person receives from
    consuming an additional unit of a
    particular product. (MU= TU/ Q)
    15

    Example 1
    Units of apple

    Total utility (TU)

    50 utils

    80 utils

    What is the marginal utility of the


    second apple?
    Or what is the additional utility of
    consuming an additional apple?
    16

    The Law of Diminishing Marginal Utility


    The

    principle that the extra


    satisfaction of a good or service
    declines as people consume
    more in a given period.
    The more of a specific product
    consumer obtains, the less they
    will desire more units of that
    product.
    17

    Illustration
    Units of hamburger

    Total Utility (TU)

    20

    35

    47

    56

    61

    61

    59

    Marginal Utility (MU)

    18

    19

    2. Maximizing Total Utility

    When the
    marginal

    utility per dollar


    of each good is equal
    and the entire budget is
    spent
    110

    Example 2:

    (Big Macs and Milkshakes = $2 each)

    BIG MACS
    Quantity

    MU MU/P

    MILKSHAKES
    MU

    MU/P

    1/2

    1/2

    0
    111

    Example 2
    marginal

    utility per dollar of


    each good is equal
    Possible Combinations:
    i.
    ii.
    entire budget is spent ($8)

    112

    3. Maximizing Total Utility consumer


    equilibrium

    Consumer equilibrium = a condition


    in which total utility cannot increase
    by spending more of a given budget
    on one good and spending less on
    another good.

    113

    Consumer Equilibrium

    MU A
    price A

    MU B
    price B

    MU Z
    = price Z

    114

    Example 3: (Price of Big Mac = $2)

    MU of Big Mac
    price of Big
    Mac

    4 utils
    $2

    MU of milkshake
    =
    price of
    milkshake

    4 utils
    $2
    115

    Example 3a
    What

    happens if the price of a Big Mac falls


    to $1 and upsets the previous equilibrium?

    MU of Big Mac
    price of Big Mac

    MU of milkshake
    > price of milkshake

    4 utils
    4 utils
    >
    $1
    $2
    42
    Consumer does not achieve consumer
    equilibrium.
    116

    Example 3b
    What should the consumer do in
    order to restore maximum total
    utility?
    To restore maximum total utility, the
    consumer spends more on Big
    Macs, spends less on milkshake.

    117

    Exercise 4
    Quantity

    Product A: Price RM2

    MU

    MU/RM

    Product B: Price RM4

    MU

    10

    24

    20

    18

    16

    12

    MU/RM

    What are the possible combinations of Product A and B?


    118

    Summary
    1. Utility is the satisfaction or pleasure derived from
    consumption of a good or service. Actual
    measurement is impossible, but economists
    assume it can be measures by a fictitious unit
    called the util.
    2. Total utility is the total level of satisfaction derived
    from all units of a good or service consumed.
    3. Marginal utility is the change in total utility from a
    1-unit change in the quantity of a good or service
    consumed.
    119

    Summary
    4. The law of diminishing marginal utility states
    that the marginal utility of a good or service
    eventually declines as consumption increases.
    5. Relationship between Marginal and Total Utility
    When TU increases, MU decreases but remain as
    positive
    When TU at maximum, MU equals zero
    When TU decreases, MU continue decreases but
    become negative

    120

    Summary
    6. Consumer equilibrium is the condition of
    reaching the maximum level of satisfaction, given a
    budget, when the marginal utility per dollar spent on
    each good purchased is equal.

    121

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