Marginal Utility

Consumer Behavior
The Law of Demand

Law of Diminishing
Marginal Utility
Total and Marginal
Utility
Theory of Consumer
Behavior
Utility Maximizing
Combination
Utility Maximization
and the Demand
Curve
Applications and
Extensions
Key Terms
● theory of consumer behavior
Description of how consumers allocate
incomes among different goods and
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services to maximize their well-being.
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8-1
Copyright McGraw-Hill/Irwin, 2005
The Law of Demand
Law of Diminishing
Marginal Utility
Total and Marginal
Utility
Consumer behavior can be
Theory of Consumer
Behavior
explained by:
Utility Maximizing
Combination • 1. theory of marginal utility
and the Demand
Curve
● cardinal utility function Utility function describing by how much
one market basket is preferred to another.
Applications and
Extensions
Key Terms
• 2. indifference curve analysis
● ordinal utility function Utility function that generates a ranking
Previous Next of market baskets in order of most to least preferred.
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8-2
TOTAL AND MARGINAL UTILITY
pizza Total Marginal
The Law of Demand consumed Utility, Utility, 30
Total Utility (utils)

Law of Diminishing per meal Utils Utils
Marginal Utility
20
0 0
Total and Marginal
Utility
1 10
Theory of Consumer
Behavior
10
Utility Maximizing
Combination
and the Demand
0 1 2 3 4 5 6 7
Curve
Applications and Units consumed per meal
Marginal Utility (utils)

Extensions 10
Key Terms 8
6
4
2
Previous Next 0
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-2
End 1 2 3 4 5 6 7
Show Units consumed per meal
8-3

Marginal Utility
20
0 0
Total and Marginal
Utility
10
1 10
Theory of Consumer
Behavior
10
Utility Maximizing
Combination
and the Demand
0 1 2 3 4 5 6 7
Curve

Extensions 10
Key Terms 8
6
4
2
Previous Next 0
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-2
End 1 2 3 4 5 6 7
8-4

Marginal Utility
20
0 0
Total and Marginal
Utility
10
1 10
Theory of Consumer
Behavior
10
Utility Maximizing 8
Combination
2 18
and the Demand
0 1 2 3 4 5 6 7
Curve

Extensions 10
Key Terms 8
6
4
2
Previous Next 0
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-2
End 1 2 3 4 5 6 7
8-5

Marginal Utility
20
0 0
Total and Marginal
Utility
10
1 10
Theory of Consumer
Behavior
10
Combination
2 18
6
and the Demand
Curve 3 24 0 1 2 3 4 5 6 7

Extensions 10
Key Terms 8
6
4
2
Previous Next 0
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-2
End 1 2 3 4 5 6 7
8-6

Marginal Utility
20
0 0
Total and Marginal
Utility
10
1 10
Theory of Consumer
Behavior
10
Combination
2 18
6
and the Demand
3 24 0 1 2 3 4 5 6 7
4
Curve
4 28

Extensions 10
Key Terms 8
6
4
2
Previous Next 0
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-2
End 1 2 3 4 5 6 7
8-7

Marginal Utility
20
0 0
Total and Marginal
Utility
10
1 10
Theory of Consumer
Behavior
10
Combination
2 18
6
and the Demand
3 24 0 1 2 3 4 5 6 7
4
Curve
4 28

10
2
Extensions
8
5 30
Key Terms
6
4
2
Previous Next 0
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-2
End 1 2 3 4 5 6 7
8-8

Marginal Utility
20
0 0
Total and Marginal
Utility
10
1 10
Theory of Consumer
Behavior
10
Combination
2 18
6
and the Demand
3 24 0 1 2 3 4 5 6 7
4
Curve
4 28

10
2
Extensions
8
5 30
Key Terms
6
0 4
Previous Next 6 30 2
0
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-2
End 1 2 3 4 5 6 7
8-9
pizza Total Marginal TU

Marginal Utility
20
0 0
Total and Marginal
Utility
10
1 10
Theory of Consumer
Behavior
10
Combination
2 18
6
and the Demand
3 24 0 1 2 3 4 5 6 7
4
Curve
4 28

10
2
Extensions
8
5 30
Key Terms
6
0 4
6 30 2
Previous Next
-2 0
7 28 MU
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-2
End 1 2 3 4 5 6 7
8 - 10
pizza Total Marginal TU

Marginal Utility
Total and Marginal
Utility 0 0
20
Observe
10 Diminishing
1 10
Theory of Consumer
Behavior
10
Combination
2 18 Marginal
6
and the Demand
3 24 0 1
Utility
2 3 4 5 6 7
4
Curve
4 28

10
2
Extensions
8
5 30
Key Terms
6
0 4
6 30 2
Previous Next
-2 0
7 28 MU
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-2
End 1 2 3 4 5 6 7
8 - 11
THEORY OF CONSUMER BEHAVIOR
The Law of Demand Utility Maximizing Rule
Law of Diminishing
The consumer’s money

Marginal Utility
Total and Marginal
Utility
Theory of Consumer
Behavior
Utility Maximizing
income should be allocated
Combination
and the Demand
so that the last dollar spent
Curve
Applications and
Extensions
on each product yields the
Key Terms
same amount of extra
Previous Next (marginal) utility.
illustrated...
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8 - 12
UTILITY MAXIMIZING COMBINATION
Product A: Product B:
The Law of Demand Price = $1 Price = $2
Law of Diminishing Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal Unit of utility, dollar utility, dollar
Utility
product utils (MU/price) utils (MU/price)
Theory of Consumer
Behavior
Utility Maximizing
Combination First 10 10 24 12
and the Demand
Curve
Second 8 8 20 10
Applications and
Extensions
Third 7 7 18 9
Key Terms
Fourth 6 6 16 8
Previous Next
Fifth 5 5 12 6
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Sixth 4 4 6 3
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8 - 13
Seventh 3 3 4 2
Assume we have Product A: Product B:
$ 10
The Law income
of Demand Price = $1 Price = $2
Utility
Theory of Consumer
Behavior
Utility Maximizing
and the Demand
Curve
Applications and
Extensions
Key Terms
How should the $10
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income be allocated?
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End
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8 - 14
$ 10 income
Utility
Theory of Consumer
Behavior
Utility Maximizing
and the Demand
Curve
Examine the two

Applications and
Extensions
Key Terms
Previous Next
marginal utilities
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End
Show
8 - 15
$ 10 income
Utility
Theory of Consumer
Behavior
Utility Maximizing
and the Demand
Curve
Examine the two

Applications and
Extensions
Key Terms
Previous Next
marginal utilities
…per dollar
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End
Show
8 - 16
$ 10 income
Utility
Theory of Consumer
Behavior
Utility Maximizing
and the Demand
Curve
Decision: Buy 1
Applications and
Extensions
Key Terms
Previous Next
Product B for $2
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End
Show
8 - 17
$ 10 income
Utility
Theory of Consumer
Behavior
Utility Maximizing
and the Demand
Curve
Second 8 8 20 10
Applications and
Extensions
Third 7 7 18 9
Key Terms
Fourth What
6 next?
6 16 8
Previous Next
Fifth 5 5 12 6
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Sixth 4 4 6 3
End
Show
8 - 18
Seventh 3 3 4 2
$ 10 income
Utility
Theory of Consumer
Behavior
Utility Maximizing
and the Demand
Curve
Second 8 8 20 10
Applications and
Extensions
Third 7 7 18 9
Key Terms
Fourth What
6 next?
6 16 8
Fifth 5 5 12 6
Previous Next Buy one of each
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Sixth 4 4 6 3
End
Show
8 - 19
Seventh 3 3 4 2
$ 10 income
Utility
Theory of Consumer
Behavior
Utility Maximizing
and the Demand
Curve
Second 8 8 20 10
Applications and
Extensions
Third 7 7 18 9
Key Terms
Fourth 6 6 16 8
Fifth
and
5
then...
5 12 6
Previous
Slide
Next
Slide
Sixth ($5
4 left)
4 6 3
End
Show
8 - 20
Seventh 3 3 4 2
$ 10 income
Utility
Theory of Consumer
Behavior
Utility Maximizing
and the Demand
Curve
Second 8 8 20 10
Applications and
Extensions
Third 7 7 18 9
Key Terms
Fourth 6 6 16 8
Fifth third
5 unit
5 of12 6
Sixth product B 6
Previous Next
Slide Slide
4 4 3
End
Show
8 - 21
Seventh 3 3 4 2
$ 10 income
Utility
Theory of Consumer
Behavior
Utility Maximizing
and the Demand
Curve
Second 8 8 20 10
Applications and
Extensions
Third 7 7 18 9
Key Terms
Fourth 6
$3 left... 6 16 8
Previous Next
Fifth 5 5 12 6
Slide Slide
Sixth 4 4 6 3
End
Show
8 - 22
Seventh 3 3 4 2
$ 10 income
Utility
Theory of Consumer
Behavior
Utility Maximizing
and the Demand
Curve
Second 8 8 20 10
Applications and
Extensions
Third 7 7 18 9
Key Terms
Fourth 6
$3 left... 6 16 8
Fifth 5 5 12 6
Previous
Slide
Next
Slide
Buy
Sixth both!
4 4 6 3
End
Show
8 - 23
Seventh 3 3 4 2
$ 10 income
Utility
Theory of Consumer
Behavior
Utility Maximizing
and the Demand
Curve
Second 8 8 20 10
Applications and
Extensions
Third 7
Income is gone... 7 18 9
Key Terms
Fourth
the last dollar 6
spent on 6 16 8
each good gave the same
Fifth 5 5 12 6
Previous Next utility (8) per dollar
Slide Slide
Sixth 4 4 6 3
End
Show
8 - 24
Seventh 3 3 4 2
The Law of Demand

Law of Diminishing
Algebraic Restatement of the
Marginal Utility
Total and Marginal
Utility
Utility Maximization Rule
Theory of Consumer
Behavior
Utility Maximizing
Combination
MU of product A MU of product B
and the Demand
Curve Price of A
= Price of B
Applications and
Extensions
Key Terms
8 Utils 16 Utils
Previous
Slide
Next
Slide
$1
= $2
End
Show
8 - 25
problem
The Law of Demand
Law of Diminishing
Marginal Utility • The table below shows how the total utility that Alan
Total and Marginal
Utility
derives from watching basketball games changes as
Theory of Consumer
he watches more and more games each week:
Behavior
Basketball Games Total Utility Marginal Utility
Utility Maximizing
Combination 1 35
Utility Maximization 2 85
and the Demand
3 110
Curve
Applications and
4 130
Extensions 5 145
Key Terms 6 155
Previous Next
Slide Slide
Fill in the table above. Do the numbers in the
End
table support the law of diminishing marginal
Show utility? Explain.
8 - 26
problem
The Law of Demand
Law of Diminishing
Marginal Utility
• Colin spends his income of $100 per week on two
Total and Marginal
Utility goods: pizzas (which cost $8 each) and milk (which
Theory of Consumer
Behavior
costs $1 per gallon). At his current level of
Utility Maximizing consumption, the marginal utility from the last pizza
Combination
consumed is 32 and the marginal utility from the last
and the Demand gallon of milk is 4. Is Colin maximizing his utility?
Curve
Why or why not? Explain.
Applications and
Extensions
Key Terms
Previous Next
Slide Slide
End
Show
8 - 27

Marginal Utility

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Consumer Behavior

The Law of Demand

Total Utility (utils)