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
consumer equilibrium
consumers has no incentive to alter expenditure
pattern
when looking at utility maximizing chart what do we do
buy unit where MU/$ is highest and move money away from good where MU/$ is low
Income Effect
change products price effect on consumer quantity demanded and purchasing power ex price decrease, income no change but purchasing power increases.
substitution effect
impact that a change in products price has on relative expensiveness and on quantity demanded of another good, move from expensive good to cheaper good.
Applications of MU/P Ipads
increase in features and marketing resulted in higher MU/P
Diamond-Water paradox
utility of water is high price is low, diamond utility is low and price high we only care about MU/$. one drop of water doesn’t increase MU but one more diamond does increase mu. “diamonds more valuable”
Opportunity Cost and Value of Time
time is a valuable economic variable
time can be used to earn money
cash and non cash gifts
consumer cash gifts preferred because non cash gifts may not match preference of consumer so total utility not maximized
Indifference Curve
Combination of A and B that gives the same utility. Consumer don’t care which combination but want to be on highest indifference curve but constrained by income
Effect of price decrease normal good (3)
Sub Effect: positive
Inc Effect: positive
Total Effect: positive
effect of price decrease inferior good (3)
sub effect: positive
income effect: negative
total effect: postive
