Consumer Behavior Mr. Bammel

Law of Diminishing Marginal Utility  The principle that the added satisfaction declines as a consumer acquires additional units of a given product;  We can buy as much of a product as our income allows, but the more we obtain the less we want more of it;  Remember Utility…the satisfaction or pleasure one gets from consuming a product;

Total Utility and Marginal Utility  Total  means “total”  Marginal  means “extra” of each additional unit;

Viewing the Graph  cement/mcconnell_18e/interactive_graphs/7_1/auth.ht ml cement/mcconnell_18e/interactive_graphs/7_1/auth.ht ml  Shows how diminishing marginal utility supports the idea that price must decrease in order for quantity demanded to increase; consumers are behaving in manner of downsloping of demand curve;

Theory of Consumer Behavior  Assume the following for all consumers:  Rational Behavior  Clear-cut preferences  A budget constraint  Prices exist in all products

Utility Maximizing Rule  To Maximize satisfaction, the consumer should allocate his or her money income so that the last dollar spent on each product yields the same amount of extra (marginal) utility;  When the consumer has “balanced his margins,” he is said to be in consumer equilibrium;  We must examine this in Marginal Utility per dollar, or MU/price;

Analysis of Data

 At what point will Holly reach Utility Maximization of Apples and Oranges with an income of $10?

Algebraic Examination  This algebraic equation merely shows that the ratios be equal for the last dollar spent on product A and Product B;  MUx/Px = MUy/Py = MUz/Pz  Why divide by price?  because you cannot compare a $1 apple with a $2 orange  dividing by price means that we are comparing a dollar's worth an apple with a dollar's worth of an orange