Chapter 7 Flashcards
Law of Diminishing Marginal Utility
added satisfaction declines as a consumer purchases additional units of a given product
Utility
want satisfying power, happiness and satisfaction obtained from consuming goods and services.
points about Utility (3)
- not closely related with usefullness
- subjective to consumers
- difficult to quantify
Total Utility
total amount or satisfaction, pleasure person derives from consuming specific quantity of good
marginal utility
extra satisfaction from one more additional unit of
good
describe the graph of total utility
tends to increase at a decreasing rate hit a maximum then decrease
describe the graph of marginal utility
graph tends to decrease
what if price falls relate with marginal utility per price as well
consumers tend to buy more units if price falls as marginal utility per price increases
theory of consumer choice (4)
rational behaviour
preference
budget constraints
prices
rational behaviour
decision and purchases purposeful
preference
consumers have different and specific preferences of goods and services
budget constraints
consumers have fixed income
prices (2)
price change results behaviour change
goods are scarce relative for demand to them so good carries price tag
Utility Maximizing Rule
to maximize satisfaction, consumers should allocate their money income so that the last dollar spent on each product yields the same amount of marginal utility per price
Utility maximizing equation
Mu of A/price of A = Mu of B/price of B