The Law of Demand Law of Diminishing Marginal

The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Theory of Consumer Behavior 21 CHAPTER Utility Maximizing Combination Utility Maximization and the Demand Curve Applications and Extensions Key Terms Previous Slide End Show 21 - 1 Next Slide Consumer Behavior and Utility Maximization Copyright Mc. Graw-Hill/Irwin, 2002

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 Previous Slide End Show 21 - 2 Next Slide LAW OF DIMINISHING MARGINAL UTILITY • Utility Defined • Subjective Nature • Difficult to Quantify Total Utility Marginal Utility graphically examined Copyright Mc. Graw-Hill/Irwin, 2002

TOTAL AND MARGINAL UTILITY Total and Marginal Utility Theory of Consumer Behavior Utility Maximizing Combination Utility Maximization and the Demand Curve Applications and Extensions Key Terms Previous Slide End Show 21 - 3 Next Slide 0 1 2 3 4 5 6 7 0 10 18 24 28 30 30 28 10 8 6 4 2 0 -2 Copyright Mc. Graw-Hill/Irwin, 2002 30 Total Utility (utils) Law of Diminishing Marginal Utility TU 20 10 0 Marginal Utility (utils) The Law of Demand Tacos Total Marginal consumed Utility, per meal Utils 1 2 3 4 5 6 7 Units consumed per meal 10 8 6 4 2 0 -2 MU 1 2 3 4 5 6 7 Units consumed per meal

THEORY OF 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 Previous Slide End Show 21 - 4 A Typical Consumer. . . • Exhibits Rational Behavior • Has Clear-Cut Preferences • Subject to a Budget Constraint • Responds to Price Changes Next Slide Copyright Mc. Graw-Hill/Irwin, 2002

THEORY OF 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 Previous Slide End Show 21 - 5 Utility Maximizing Rule The consumer’s money income should be allocated so that the last dollar spent on each product yields the same amount of extra (marginal) utility illustrated. . . Next Slide Copyright Mc. Graw-Hill/Irwin, 2002

UTILITY MAXIMIZING COMBINATION $ 10 income 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 Previous Slide End Show 21 - 6 Next Slide Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility per dollar utility, (MU/price) utils Marginal utility per dollar (MU/price) First 10 Second 8 Third 7 Fourth 6 Fifth 5 Sixth 4 Seventh 3 Copyright Mc. Graw-Hill/Irwin, 2002 10 8 7 6 5 4 3 Marginal utility, utils 24 20 18 16 12 6 4 12 10 9 8 6 3 2

UTILITY MAXIMIZING COMBINATION The Law of Demand Law of Diminishing Marginal Utility Total and Marginal Utility Algebraic Restatement of the Utility Maximization Rule Theory of Consumer Behavior Utility Maximizing Combination Utility Maximization and the Demand Curve Applications and Extensions MU of product A Price of A Key Terms Previous Slide End Show 21 - 7 Next Slide Copyright Mc. Graw-Hill/Irwin, 2002 = MU of product B Price of B

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 Previous Slide End Show 21 - 8 Next Slide UTILITY MAXIMIZATION AND THE DEMAND CURVE Deriving the Demand Schedule and Curve Given from the previous example schedule: • Preferences or Tastes • Money Income • Prices of Other Goods Copyright Mc. Graw-Hill/Irwin, 2002

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 Previous Slide End Show 21 - 9 Next Slide UTILITY MAXIMIZATION AND THE DEMAND CURVE Deriving the Demand Schedule and Curve Create a demand schedule from the purchase decisions as the price of the product is varied. . . Price per unit of B $2 1 Quantity Demanded 4 6 Graphically… Copyright Mc. Graw-Hill/Irwin, 2002

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 Previous Slide End Show 21 - 10 Next Slide Price per unit of Good B The Law of Demand UTILITY MAXIMIZATION AND THE DEMAND CURVE Deriving the Demand Schedule and Curve $2 1 DB 0 Copyright Mc. Graw-Hill/Irwin, 2002 4 6 Quantity Demanded of Good B

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 Previous Slide End Show 21 - 11 Next Slide Price per unit of Good B The Law of Demand UTILITY MAXIMIZATION AND THE DEMAND CURVE Deriving the Demand Schedule and Curve $2 1 DB 0 Copyright Mc. Graw-Hill/Irwin, 2002 4 6 Quantity Demanded of Good B

APPLICATIONS AND EXTENSIONS 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 Previous Slide End Show 21 - 12 Next Slide The Compact Disc Takeover The Diamond-Water Paradox The Value of Time Medical Care Purchases Cash and Noncash Gifts Chapter Conclusions Copyright Mc. Graw-Hill/Irwin, 2002