2. 8 - 1 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show Consumer Behavior and Utility Maximization 8 C H A P T E R

3. 8 - 2 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show THE LAW OF DEMAND A Closer Look… The Income Effect A lower price frees income for additional purchases - and vice versa The Substitution Effect A lower price relative to other goods attracts new buyers - and vice versa

4. 8 - 3 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show LAW OF DIMINISHING MARGINAL UTILITY Utility Defined Subjective Nature Difficult to Quantify Total Utility Marginal Utility graphically examined...

5. 8 - 4 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0101 0 10 Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7

6. 8 - 5 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0101 0 10 Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7

7. 8 - 6 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 012012 0 10 18 10 8 Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7

8. 8 - 7 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 01230123 0 10 18 24 10 8 6 0 1 2 3 4 5 6 7 Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 1 2 3 4 5 6 7

9. 8 - 8 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0123401234 0 10 18 24 28 10 8 6 4 Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7

10. 8 - 9 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 012345012345 0 10 18 24 28 30 10 8 6 4 2 Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7

11. 8 - 10 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 01234560123456 0 10 18 24 28 30 10 8 6 4 2 0 Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7

12. 8 - 11 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0123456701234567 0 10 18 24 28 30 28 10 8 6 4 2 0 -2 Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 TU MU 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7

13. 8 - 12 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0123456701234567 0 10 18 24 28 30 28 10 8 6 4 2 0 -2 Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 TU MU 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7 Observe Diminishing Marginal Utility

14. 8 - 13 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show THEORY OF CONSUMER BEHAVIOR Consumer Choice and Budget Constraint Rational Behavior Clear-Cut Preferences Subject to a Budget Constraint Responds to Price Changes

15. 8 - 14 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show THEORY OF CONSUMER BEHAVIOR 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...

16. 8 - 15 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show First 10 10 24 12 $ 10 income UTILITY MAXIMIZING COMBINATION How should the $10 income be allocated? Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price)

17. 8 - 16 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show First 10 10 24 12 $ 10 income UTILITY MAXIMIZING COMBINATION Examine the two marginal utilities Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price)

18. 8 - 17 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show First 10 10 24 12 $ 10 income UTILITY MAXIMIZING COMBINATION Examine the two marginal utilities …per dollar Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price)

19. 8 - 18 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show First 10 10 24 12 $ 10 income UTILITY MAXIMIZING COMBINATION Decision: Buy 1 Product B for $2 Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price)

20. 8 - 19 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 Fifth 5 5 12 6 Sixth 4 4 6 3 Seventh 3 3 4 2 $ 10 income UTILITY MAXIMIZING COMBINATION What next? Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price)

21. 8 - 20 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 Fifth 5 5 12 6 Sixth 4 4 6 3 Seventh 3 3 4 2 $ 10 income UTILITY MAXIMIZING COMBINATION What next? Buy one of each Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price)

22. 8 - 21 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 Fifth 5 5 12 6 Sixth 4 4 6 3 Seventh 3 3 4 2 $ 10 income UTILITY MAXIMIZING COMBINATION and then... ($5 left) Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price)

23. 8 - 22 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 Fifth 5 5 12 6 Sixth 4 4 6 3 Seventh 3 3 4 2 $ 10 income UTILITY MAXIMIZING COMBINATION third unit of product B Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price)

24. 8 - 23 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 Fifth 5 5 12 6 Sixth 4 4 6 3 Seventh 3 3 4 2 $ 10 income UTILITY MAXIMIZING COMBINATION $3 left... Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price)

25. 8 - 24 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 Fifth 5 5 12 6 Sixth 4 4 6 3 Seventh 3 3 4 2 $ 10 income UTILITY MAXIMIZING COMBINATION $3 left... Buy both! Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price)

26. 8 - 25 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 Fifth 5 5 12 6 Sixth 4 4 6 3 Seventh 3 3 4 2 $ 10 income UTILITY MAXIMIZING COMBINATION Income is gone... the last dollar spent on each good gave the same utility (8) per dollar Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price)

27. 8 - 26 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show Algebraic Restatement of the Utility Maximization Rule MU of product A Price of A MU of product B Price of B = UTILITY MAXIMIZING COMBINATION 8 Utils $1 16 Utils $2 =

28. 8 - 27 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show UTILITY MAXIMIZATION AND THE DEMAND CURVE Deriving the Demand Schedule and Curve Preferences or Tastes Money Income Prices of Other Goods Given from the previous example schedule:

29. 8 - 28 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show UTILITY MAXIMIZATION AND THE DEMAND CURVE Create a demand schedule from the purchase decisions as the price of the product is varied... Price per unit of B Quantity Demanded $24 16 Graphically… Deriving the Demand Schedule and Curve

30. 8 - 29 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show UTILITY MAXIMIZATION AND THE DEMAND CURVE Deriving the Demand Schedule and Curve Quantity Demanded of Good B Price per unit of Good B $2 1 0 4 6 DBDB

31. 8 - 30 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show UTILITY MAXIMIZATION AND THE DEMAND CURVE Deriving the Demand Schedule and Curve Quantity Demanded of Good B Price per unit of Good B $2 1 0 4 6 DBDB Income and Substitution Effects Revisited

32. 8 - 31 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show APPLICATIONS AND EXTENSIONS DVDs and DVD Players The Diamond-Water Paradox The Value of Time Medical Care Purchases Cash and Noncash Gifts

33. income effect substitution effect utility total utility marginal utility law of diminishing marginal utility rational behavior budget constraint utility-maximizing rule ENDBACK Copyright McGraw-Hill/Irwin, 2005

34. 8 - 33 Copyright McGraw-Hill/Irwin, 2005 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 Next Slide End Show Next… Indifference Curve Analysis