1. DO NOW!!
If you had $500, what items would you buy, and how many of each? How did you decide?
Imagine you get $1000 of utility from buying an car, but only $1 of utility from buying a shirt.
 Would you ever choose to buy the shirt? Why or why not?

2. Why do consumers buy what they buy??
Consumer Behavior
Why do consumers buy what they buy??

3. Maximizing Utility Consumers’ goal: Max Total Utility
Remember Law of Diminishing MU
Must find MU per dollar = MU/Price
MU of Product A = MU of product B
Price of A Price of B
*Note: If MUa /Pa > MUb / Pb , then Buy more of product A.

4. We have 5$ and can buy apples or oranges. Apples cost 1$
We have 5$ and can buy apples or oranges. Apples cost 1$. Oranges cost $2. How many of each should we buy? What if we had $3? $9? $11?
Apples Oranges Q TU
MU/p 1 8 2 14 3 19 4 20 Q TU
MU/p 1 10 5 2 18 3 24 4 28

5. Income and Substitution Effects
Substitution Effect: P down means MU/P rises, so the consumer substitutes toward the good.
Income Effect: P down means same bundle is cheaper = like income rise
 Can buy more of all goods!

6. We have 5$ and can buy apples or oranges. Apples cost 1$
We have 5$ and can buy apples or oranges. Apples cost 1$. Oranges cost $2. How many of each should we buy? What if price of oranges = $1?
Apples Oranges Q TU
MU/p 1 8 2 14 6 3 19 5 4 20 Q TU
MU/p 1 10 2 18 3 24 4 28

7. Income and Substitution Effects
Let’s compare apples and oranges…
MUa =8, Pa= 1, MUo = 16, Po = 2
8/1 = 16/2  at equilibrium 
* Now, P of oranges falls to 1...
8/1 < 16/1 …
People switch to oranges (Sub. Effect)
Can buy more of each (income effect)