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Consumer Choice and Utility The Demand Curve and Utility Theory of Consumer Choice and Utility Free to share, print, make copies and changes. Get yours at www. boundless. com
Consumer Choice and Utility > The Demand Curve and Utility • Defining Utility • Theory of Utility • Marginal Utility • Principle of Diminishing Marginal Utility Free to share, print, make copies and changes. Get yours at www. boundless. com/economics/textbooks/boundless-economics-textbook/consumer-choice-and-utility-5/the-demand-curve-and-utility-52/
Consumer Choice and Utility > Theory of Consumer Choice • Introducing the Budget Constraint • Mapping Preferences with Indifference Curves • Properties of Indifference Curves • Impact of Income on Consumer Choices • Impact of Price on Consumer Choices • Deriving the Demand Curve • Applications of Principles on Consumer Choices Free to share, print, make copies and changes. Get yours at www. boundless. com/economics/textbooks/boundless-economics-textbook/consumer-choice-and-utility-5/theory-of-consumer-choice-53/
Appendix Free to share, print, make copies and changes. Get yours at www. boundless. com
Consumer Choice and Utility Key terms • cardinal Describing a "natural" number used to indicate quantity (e. g. , one, two, three), as opposed to an ordinal number indicating relative position. • Complement A good with a negative cross elasticity of demand, meaning the good's demand is increased when the price of another good is decreased. • Derivation The operation of deducing one function from another according to some fixed law, called the law of derivation, as the of differentiation or of integration. • elasticity The sensitivity of changes in a quantity with respect to changes in another quantity. • Giffen good A good which people consume more of as only the price rises; Having a positive price elasticity of demand. • Income Effect The change in consumption resulting from a change in real income. • Income Effect The change in consumption choices due to changes in the amount of money available for an individual to spend. • Inferior goods A good that decreases in demand when consumer income rises; having a negative income elasticity of demand. • marginal Of, relating to, or located at or near a margin or edge; also figurative usages of location and margin (edge). • marginal benefit The extra benefit received from a small increase in the consumption of a good or service. It is calculated as the increase in total benefit divided by the increase in consumption. • ordinal Of a number, indicating position in a sequence. Free to share, print, make copies and changes. Get yours at www. boundless. com
Consumer Choice and Utility • purchasing power The amount of goods and services that can be bought with a unit of currency or by consumers. • Rational individual A person who chooses the option that, all else equal, gives the greatest utility. • substitute A good with a positive cross elasticity of demand, meaning the good's demand is increased when the price of another is increased. • substitution effect The change in demand for one good that is due to the relative prices and availability of substitute goods. • Trade-offs Any situation in which the quality or quantity of one thing must be decreased for another to be increased. • Transitive Having the property that if an element is related to and is related to , then is necessarily related to. • utility The ability of a commodity to satisfy needs or wants; the satisfaction experienced by the consumer of that commodity. • Wealth Effect The change in an individual's consumption choices due to changes in perception of how rich s/he is. Free to share, print, make copies and changes. Get yours at www. boundless. com
Consumer Choice and Utility Income Effects on Consumption and Budget Constraints This graphical representation of a consumers income(I) and budget constraints (BC) underlines the variance in quantity of 'Good X' and 'Good Y' that will be demanded dependent upon income circumstance. Naturally, a higher income will result in a shift towards increase in quantity for many consumable goods/services. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikimedia. CC BY-SA http: //upload. wikimedia. org/wikipedia/commons/1/1 f/Consumer_constraint_choice_income_shift. svg View on Boundless. com
Consumer Choice and Utility Substitution Effect This two-part graphical representation of the substitution effect identifies the relationship between the price of a given good and the quantity purchased by a given consumer. As the bottom half effectively highlights, a higher price will dictate a lower quantity consumer for 'Good Y', while a lower price will create a higher quantity. This translates to the graph above as the consumer makes choices to maximize utility when comparing the price of different goods to a given income level. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikimedia. CC BY-SA http: //upload. wikimedia. org/wikipedia/en/a/a 3/Found_demand. svg View on Boundless. com
Consumer Choice and Utility Income Levels and Inferior Goods This graph demonstrates the inverse relationship between income and the consumption of inferior goods. As income rises, the quantity consumed of 'X 1' decreases. This illustrates increased variance in consumer choice as income rises. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikimedia. CC BY-SA http: //upload. wikimedia. org/wikipedia/commons/4/47/Income_consumption_curve_graph_-_downward_sloping_(inferior_goods). svg View on Boundless. com
Consumer Choice and Utility Marginal Utility of Housing The marginal utility of owning a second house is likely less than the marginal utility of owning the first house. Free to share, print, make copies and changes. Get yours at www. boundless. com Flickr. "All sizes | Housing | Flickr - Photo Sharing!. " CC BY http: //www. flickr. com/photos/jwthompson 2/139445633/sizes/o/in/photolist-dj. Gk 4 -ip 5 Aa-k 1 a 2 z-q. Ym. WJxd. RJo-Lwqd. Y-LVWh. M-2 Jzxgz-4 BPYBw-4 P 1 ys. L-4 S 25 hu-5 k. Sj. Mu-5 PB 99 X-5 RAZop-5 Vkk. Tj-5 Zc 2 Q 8 -66 EAg 3 -6 pp 6 Zx-6 u. USba-6 u. USg 2 -6 xzr 7 k-6 x. Ck. Jw-6 B 5 n. QA-
Consumer Choice and Utility Deriving the Demand Curve (Normal Goods) This illustration demonstrates the way in which economists can identify a series of prices and quantities for goods demanded, which ultimately represents the overall demand curve for a given product/service. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikieducator. CC BY-SA http: //wikieducator. org/images/8/8 f/Demand 11. jpeg View on Boundless. com
Consumer Choice and Utility Demand Shifts This graph demonstrates a shift in overall demand in the market, where the generation of a new parallel demand curve is required to accurately represent consumer choices. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikimedia. CC BY-SA http: //upload. wikimedia. org/wikipedia/commons/7/7 a/Supply-and-demand. svg View on Boundless. com
Consumer Choice and Utility Indifference Curve A consumer will be just as happy with any combination of Good X and Y on indifference curve I 1, though s/he will prefer any bundle on indifference curve I 2 or I 3. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikimedia. "Simple-indifference-curves. " GNU FDL http: //commons. wikimedia. org/wiki/File: Simple-indifference-curves. svg View on Boundless. com
Consumer Choice and Utility Apples and Oranges Utility allows you to compare apples and oranges based on which you prefer. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikimedia. Public domain http: //upload. wikimedia. org/wikipedia/commons/thumb/0/06/Paul_Cezanne_Apples_and_Oranges. jpg/304 px. Paul_Cezanne_Apples_and_Oranges. jpg View on Boundless. com
Consumer Choice and Utility Budget Curve A budget curve demonstrates the relationship between two goods relative to opportunity costs, essentially deriving the relative value of each good based on quantity and utility. Keep in mind that moving from one point on the in to another is trading off '' amount of one good for '' amount of another. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikimedia. CC BY-SA http: //upload. wikimedia. org/wikipedia/commons/0/0 a/Budget_constraint. svg View on Boundless. com
Consumer Choice and Utility Consumer making a decision When making an economically rational purchasing decision, a consumer must consider all of their personal preferences. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikipedia. "US Navy 060513 -N-5174 T-045 Lt. Taylor Forester makes a few last minute decisions before purchasing a gold necklace from a Navy Exchange vendor aboard the Nimitz-class aircraft carrier USS Ronald Reagan (CVN 76). " CC BY-SA http: //en. wikipedia. org/wiki/File: US_Navy_060513 -N-5174 T-
Consumer Choice and Utility Total and marginal utility As you can see in the chart, the more of a good you consume, the further its marginal utility decreases. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikimedia. "Marginal-utility. " CC BY-SA http: //commons. wikimedia. org/wiki/File: Marginal-utility. png View on Boundless. com
Consumer Choice and Utility Indifference Curves Indifference curves are designed to represent an equal perception of overall value in a given basket of goods relative to a specific consumer. That is to say that each point along the curve is considered by the consumer of equivalent value despite alterations in the quantity of each good, as these tradeoffs are consider of equal value and thus indifferent. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikimedia. CC BY-SA http: //upload. wikimedia. org/wikipedia/commons/e/ed/Indifference_curves_showing_budget_line. svg View on Boundless. com
Consumer Choice and Utility Price Elasticity As this graph demonstrates, the slope of the demand curve will vary as a direct result of how elastic consumer purchasing behaviors will be compared to price changes. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikimedia. CC BY-SA http: //upload. wikimedia. org/wikipedia/commons/e/ee/Elasticity_and_Two_Demand_Curves. jpg View on Boundless. com
Consumer Choice and Utility Demand Curve for Giffen Goods Giffen goods are essentially goods that demonstrate an increase in demand as a result of an increase in price, generally considered counter-intuitive in traditional economic models. This graph illustrates the derivation of a demand curve for these goods. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikieducator. CC BY-SA http: //wikieducator. org/images/c/cf/Demand 2 b. jpeg View on Boundless. com
Consumer Choice and Utility Labor Supply Curve The concept of labor supply economics is most efficiently communicated via the following graphical representation. This graph demonstrates the relationship between hours work and overall wage rates, demonstrating the shift in utility as wages increase. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikimedia. CC BY-SA http: //upload. wikimedia. org/wikipedia/commons/3/3 e/Labour_supply. svg View on Boundless. com
Consumer Choice and Utility Income-Consumption Curve Simply put, increases or decreases in income will alter the optimal quantity (and thus relative utility) of a given basket of goods for a specific consumer. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikimedia. CC BY-SA http: //upload. wikimedia. org/wikipedia/commons/d/d 7/Income_consumption_curve_graph. svg View on Boundless. com
Consumer Choice and Utility Perfect Substitute Indifference Curve In this particular series of indifference curves it is clear that 'Good X' and 'Good Y' are perfect substitutes for one another. That is to say that the utility of one is identical to the utility of the other across all quantities represented on the map. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikimedia. CC BY-SA http: //upload. wikimedia. org/wikipedia/commons/5/5 e/Indifference-curves-perfect-substitutes. svg View on Boundless. com
Consumer Choice and Utility Perfect Complement Indifference Curve The perfect right angle in this series of indifference curves implies that the utility of 'Good X' and 'Good Y' are entirely interdependent. This is to say that in order to enjoy one good it is necessary to also have the other. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikimedia. CC BY-SA http: //upload. wikimedia. org/wikipedia/commons/c/cd/Indifference-curves-perfect-complements. svg View on Boundless. com
Consumer Choice and Utility Income Effect on Complementary Goods In this graphical depiction of income increases, the consumption of these two goods are complementary and thus interdependent. Free to share, print, make copies and changes. Get yours at www. boundless. com Wikimedia. CC BY-SA http: //upload. wikimedia. org/wikipedia/commons/e/e 7/Income_consumption_curve_graph_-_linear_(perfect_complements). svg View on Boundless. com
Consumer Choice and Utility Attribution • Wiktionary. "utility. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/utility • Wiktionary. "ordinal. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/ordinal • Wiktionary. "cardinal. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/cardinal • Wikipedia. "Cardinal utility. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Cardinal_utility%23 Analytic_properties • Wikipedia. "Utility theory. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Utility_theory%23 Quantifying_utility • Wikibooks. "Principles of Economics/Utility. " CC BY-SA 3. 0 http: //en. wikibooks. org/wiki/Principles_of_Economics/Utility • Boundless Learning. "Boundless. " CC BY-SA 3. 0 http: //www. boundless. com//economics/definition/rational-individual • Wikibooks. "Principles of Economics/Utility. " CC BY-SA 3. 0 http: //en. wikibooks. org/wiki/Principles_of_Economics/Utility • Wiktionary. "marginal. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/marginal • Wiktionary. "cardinal. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/cardinal • Wikipedia. "Marginal utility. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Marginal_utility%23 Quantified_marginal_utility • Wikipedia. "Marginal utility. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Marginal_utility • Wikibooks. "Principles of Economics/Marginal Utility. " CC BY-SA 3. 0 http: //en. wikibooks. org/wiki/Principles_of_Economics/Marginal_Utility • Wiktionary. "marginal benefit. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/marginal_benefit • Wiktionary. "utility. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/utility Free to share, print, make copies and changes. Get yours at www. boundless. com
Consumer Choice and Utility • Wikipedia. "Marginal utility. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Marginal_utility%23 Marginality • Wikibooks. "Principles of Economics/Marginal Utility. " CC BY-SA 3. 0 http: //en. wikibooks. org/wiki/Principles_of_Economics/Marginal_Utility • Wiktionary. "utility. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/utility • Wiktionary. "Trade-offs. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/Trade-offs • Wikispaces. "MBAecon - budget constraints. " CC BY-SA http: //mbaecon. wikispaces. com/budget++constraints • Wikipedia. "Budget constraint. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Budget_constraint • Boundless Learning. "Boundless. " CC BY-SA 3. 0 http: //www. boundless. com//economics/definition/complement • Wiktionary. "substitute. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/substitute • Wikipedia. "Consumer choice. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Consumer_choice • Wikieducator. "CONSUMER'S EQUILIBRIUM - Wiki. Educator. " CC BY-SA http: //wikieducator. org/CONSUMER'S_EQUILIBRIUM • Wikibooks. "Principles of Economics/Indifference. " CC BY-SA 3. 0 http: //en. wikibooks. org/wiki/Principles_of_Economics/Indifference%23 Indifference_curves • Wikipedia. "Indifference curve. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Indifference_curve • Wiktionary. "utility. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/utility • Wiktionary. "Transitive. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/Transitive • Wikipedia. "Indifference curve. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Indifference_curve • Wikieducator. "CONSUMER'S EQUILIBRIUM - Wiki. Educator. " CC BY-SA http: //wikieducator. org/CONSUMER'S_EQUILIBRIUM • Wikibooks. "Principles of Economics/Indifference. " CC BY-SA 3. 0 http: //en. wikibooks. org/wiki/Principles_of_Economics/Indifference%23 Indifference_curves Free to share, print, make copies and changes. Get yours at www. boundless. com • Boundless Learning. "Boundless. " CC BY-SA 3. 0 http: //www. boundless. com//economics/definition/wealth-effect-691 d 46 b 2 -
Consumer Choice and Utility • Boundless Learning. "Boundless. " CC BY-SA 3. 0 http: //www. boundless. com//economics/definition/income-effect-b 707 cd 10 af 61 -4 f 1 e-9 a 75 -eb 682 f 08968 e • Wiktionary. "Inferior goods. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/Inferior+goods • Wikipedia. "Wealth effect. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Wealth_effect • Wikipedia. "Consumer choice. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Consumer_choice • Wikipedia. "Income–consumption curve. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Income%E 2%80%93 consumption_curve • Wiktionary. "elasticity. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/elasticity • Wikieducator. "DERIVATION OF THE DEMAND CURVE - Wiki. Educator. " CC BY-SA http: //wikieducator. org/DERIVATION_OF_THE_DEMAND_CURVE • Wikiversity. "Building the demand curve. " CC BY-SA http: //en. wikiversity. org/wiki/Building_the_demand_curve • Wikiversity. "Consumer Theory. " CC BY-SA http: //en. wikiversity. org/wiki/Consumer_Theory • Wikipedia. "Consumer choice. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Consumer_choice • Wiktionary. "Giffen good. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/Giffen_good • Wiktionary. "Derivation. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/Derivation • Wikipedia. "Giffen good. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Giffen_good • Subwiki. "Demand curve - Market. " CC BY-SA http: //market. subwiki. org/wiki/Demand_curve • Wikieducator. "DERIVATION OF THE DEMAND CURVE - Wiki. Educator. " CC BY-SA http: //wikieducator. org/DERIVATION_OF_THE_DEMAND_CURVE • Wikipedia. "Demand curve. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Demand_curve • Wikipedia. "Consumer choice. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Consumer_choice • Wiktionary. "purchasing power. " CC BY-SA 3. 0 http: //en. wiktionary. org/wiki/purchasing_power Free to share, print, make copies and changes. Get yours at www. boundless. com
Consumer Choice and Utility • Wikipedia. "substitution effect. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/substitution%20 effect • Boundless Learning. "Boundless. " CC BY-SA 3. 0 http: //www. boundless. com//economics/definition/income-effect-b 707 cd 10 af 61 -4 f 1 e-9 a 75 -eb 682 f 08968 e • Wikipedia. "Consumer choice. " CC BY-SA 3. 0 http: //en. wikipedia. org/wiki/Consumer_choice • Wikibooks. "Principles of Economics/Labor Supply. " CC BY-SA 3. 0 http: //en. wikibooks. org/wiki/Principles_of_Economics/Labor_Supply • Wikibooks. "Marketing/Consumer Behavior. " CC BY-SA 3. 0 http: //en. wikibooks. org/wiki/Marketing/Consumer_Behavior Free to share, print, make copies and changes. Get yours at www. boundless. com
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