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Consumer Behavior and Utility Maximization: End Show
Consumer Behavior and Utility Maximization: End Show
Law of Diminishing
Marginal Utility
Total and Marginal U
tility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
21 CHAPTER
Utility Maximization
and the Demand Cur
ve
Applications and Exte
nsions
Key Terms
Total Utility
Applications and Exte
nsions
Key Terms
Previous Next
Marginal Utility
Slide
End
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Slide
graphically examined..
21 - 3
Copyright McGraw-Hill/Irwin, 2005
TOTAL AND MARGINAL UTILITY
Tacos Total Marginal
The Law of Demand consumed Utility, Utility, 30
ombination
Utility Maximization
and the Demand Cur
ve 0 1 2 3 4 5 6 7
Applications and Exte
nsions Units consumed per meal
ombination
Utility Maximization
and the Demand Cur
ve 0 1 2 3 4 5 6 7
Applications and Exte
nsions Units consumed per meal
Previous Next 6 30 2
0
Slide Slide -2
End 1 2 3 4 5 6 7
Show Units consumed per meal
21 - 10
Copyright McGraw-Hill/Irwin, 2005
TOTAL AND MARGINAL UTILITY
Tacos Total Marginal TU
The Law of Demand consumed Utility, Utility, 30
Previous
Slide
Next
Slide
(marginal) utility.
End
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21 - 14
Copyright McGraw-Hill/Irwin, 2005
Illustrated...
UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal U
tility
Unit of utility, dollar utility, dollar
Theory of Consumer product utils (MU/price) utils (MU/price)
Behavior
Utility Maximizing C
ombination First 10 10 24 12
Utility Maximization
and the Demand Cur
ve
Applications and Exte
nsions
Key Terms
Previous Next
marginal utilities
Slide Slide
End
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21 - 16
Copyright McGraw-Hill/Irwin, 2005
UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal U
tility
Unit of utility, dollar utility, dollar
Theory of Consumer product utils (MU/price) utils (MU/price)
Behavior
Utility Maximizing C
ombination First 10 10 24 12
Utility Maximization
and the Demand Cur
ve
Applications and Exte
Previous Next
marginal utilities
…per dollar
Slide Slide
End
Show
21 - 17
Copyright McGraw-Hill/Irwin, 2005
UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal U
tility
Unit of utility, dollar utility, dollar
Theory of Consumer product utils (MU/price) utils (MU/price)
Behavior
Utility Maximizing C
ombination First 10 10 24 12
Utility Maximization
and the Demand Cur
ve
Applications and Exte
Decision: Buy 1
nsions
Key Terms
Previous Next
Product B for $2
Slide Slide
End
Show
21 - 18
Copyright McGraw-Hill/Irwin, 2005
UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal U
tility
Unit of utility, dollar utility, dollar
Theory of Consumer product utils (MU/price) utils (MU/price)
Behavior
Utility Maximizing C
ombination First 10 10 24 12
Utility Maximization
and the Demand Cur
ve Second 8 8 20 10
Applications and Exte
nsions Third 7 7 18 9
Fourth What next?
Key Terms
6 6 16 8
Previous Next
Fifth 5 5 12 6
Slide Slide
Sixth 4 4 6 3
End
Show
21 - 19
Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal U
tility
Unit of utility, dollar utility, dollar
Theory of Consumer product utils (MU/price) utils (MU/price)
Behavior
Utility Maximizing C
ombination First 10 10 24 12
Utility Maximization
and the Demand Cur
ve Second 8 8 20 10
Applications and Exte
nsions Third 7 7 18 9
Fourth What next?
Key Terms
6 6 16 8
Fifth 5 5 12 6
Previous Next Buy one of each
Slide Slide
Sixth 4 4 6 3
End
Show
21 - 20
Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal U
tility
Unit of utility, dollar utility, dollar
Theory of Consumer product utils (MU/price) utils (MU/price)
Behavior
Utility Maximizing C
ombination First 10 10 24 12
Utility Maximization
and the Demand Cur
ve Second 8 8 20 10
Applications and Exte
nsions 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 left)
4 4 6 3
End
Show
21 - 21
Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal U
tility
Unit of utility, dollar utility, dollar
Theory of Consumer product utils (MU/price) utils (MU/price)
Behavior
Utility Maximizing C
ombination First 10 10 24 12
Utility Maximization
and the Demand Cur
ve Second 8 8 20 10
Applications and Exte
nsions Third 7 7 18 9
Key Terms
Fourth 6 6 16 8
Fifth third
5 unit
5 of
12 6
Previous
Slide
End
Next
Slide
Sixth product
4 4 B 6 3
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21 - 22
Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal U
tility
Unit of utility, dollar utility, dollar
Theory of Consumer product utils (MU/price) utils (MU/price)
Behavior
Utility Maximizing C
ombination First 10 10 24 12
Utility Maximization
and the Demand Cur
ve Second 8 8 20 10
Applications and Exte
nsions 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
21 - 23
Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal U
tility
Unit of utility, dollar utility, dollar
Theory of Consumer product utils (MU/price) utils (MU/price)
Behavior
Utility Maximizing C
ombination First 10 10 24 12
Utility Maximization
and the Demand Cur
ve Second 8 8 20 10
Applications and Exte
nsions 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
21 - 24
Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income
The Law of Demand Price = $1 Price = $2
Law of Diminishing Marginal Marginal
Marginal Utility Marginal utility per Marginal utility per
Total and Marginal U
tility
Unit of utility, dollar utility, dollar
Theory of Consumer product utils (MU/price) utils (MU/price)
Behavior
Utility Maximizing C
ombination First 10 10 24 12
Utility Maximization
and the Demand Cur
ve Second 8 8 20 10
Applications and Exte
nsions Third 7
Income is gone... 7 18 9
Key Terms
Fourth
the last dollar 6spent on6 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
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21 - 25
Seventh 3 3 4 2
Copyright McGraw-Hill/Irwin, 2005
UTILITY MAXIMIZING COMBINATION
8 Utils 16 Utils
Previous
Slide
Next
Slide
$1
= $2
End
Show
21 - 26
Copyright McGraw-Hill/Irwin, 2005
UTILITY MAXIMIZATION AND
The Law of Demand
THE DEMAND CURVE
Law of Diminishing
Marginal Utility Deriving the Demand Schedule
Total and Marginal U
tility
Theory of Consumer
and Curve
Behavior
Utility Maximizing C
ombination Given from the previous example schedule:
Utility Maximization
and the Demand Cur
ve
Applications and Exte
• Preferences or Tastes
• Money Income
nsions
Key Terms
Previous Next
• Prices of Other Goods
Slide Slide
End
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21 - 27
Copyright McGraw-Hill/Irwin, 2005
UTILITY MAXIMIZATION AND
The Law of Demand
THE DEMAND CURVE
Law of Diminishing
Marginal Utility Deriving the Demand Schedule
Total and Marginal U
tility
Theory of Consumer
and Curve
Create a demand schedule from the
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Cur
purchase decisions as the price of
the product is varied ...
ve
Applications and Exte
nsions
Key Terms
Price per unit of B Quantity Demanded
$2 4
Previous
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Next
Slide 1 6
End
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21 - 28
Copyright McGraw-Hill/Irwin, 2005
Graphically…
UTILITY MAXIMIZATION AND
THE DEMAND CURVE
Deriving the Demand Schedule
The Law of Demand
Law of Diminishing
Marginal Utility
Total and Marginal U
tility
and Curve
Theory of Consumer
Behavior
Utility Maximizing C Price per unit of Good B
$2
ombination
Utility Maximization
and the Demand Cur
ve
Applications and Exte
nsions
Key Terms 1
Previous Next DB
Slide Slide
End 0
Show 4 6
21 - 29 Quantity Demanded of Good B
Copyright McGraw-Hill/Irwin, 2005
UTILITY MAXIMIZATION AND
THE DEMAND CURVE
Deriving the Demand Schedule
The Law of Demand
Law of Diminishing
Marginal Utility
Total and Marginal U and Curve
Income and
tility
Theory of Consumer
Behavior
Utility Maximizing C $2 Price per unit of Good B
ombination
Utility Maximization
and the Demand Cur
ve
Substitution Effects
Applications and Exte
nsions
Key Terms
Revisited
1
Previous Next DB
Slide Slide
End 0
Show 4 6
21 - 30 Quantity Demanded of Good B
Copyright McGraw-Hill/Irwin, 2005
APPLICATIONS AND EXTENSIONS
The Law of Demand
Law of Diminishing
DVDs and DVD Players
The Diamond-Water
Marginal Utility
Total and Marginal U
tility
Theory of Consumer
Behavior
Utility Maximizing C
Paradox
ombination
Utility Maximization
and the Demand Cur
The Value of Time
Medical Care Purchases
ve
Applications and Exte
nsions
Key Terms
Cash and Noncash Gifts
Previous Next
Slide Slide
End
Show
21 - 31
Copyright McGraw-Hill/Irwin, 2005
income effect
substitution effect
utility
total utility
marginal utility
law of diminishing marginal utility
rational behavior
budget constraint
utility-maximizing rule
Copyright McGraw-Hill/Irwin, Inc. 2005 BACK END
The Law of Demand
Law of Diminishing
Marginal Utility
Next…
Total and Marginal U
tility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Cur
ve
Applications and Exte
nsions
Key Terms
Previous
Slide
Next
Slide
Indifference Curve Analysis
End
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21 - 33
Copyright McGraw-Hill/Irwin, 2005