2. 1 Chapter 6 Consumer Choice & Demand These slides supplement the textbook, but should not replace reading the textbook

3. 2 In our analysis of consumer choice, what important assumption do we make? People would rather have more than less

4. 3 What is a demand curve? A demand curve shows how many units will be demanded at various prices

5. 4 Why do demand curves slope downward to the right? Because there will be an change in the quantity demanded as price changes

6. 5 With a change in price, what about other things? When price changes we assume that everything else stays the same

7. 6 D P1 Q1 P2 Q2 Demand Curve

8. 7 What is the difference between wants and demand? We live in a world of unlimited wants - but the things that you demand are those things you are able and willing to buy

9. 8 What is the difference between money income and real income? Your money income increases with a pay raise, but your real income increases only if your pay increases more than inflation

10. 9 Shift in Demand D1 D2 P Q

11. 10 What can cause a shift in demand? A change in  incomes  tastes  number of consumers  prices of related goods  expectations

12. 11 What are tastes? A consumer’s preferences for different goods and services

13. 12 What is utility? Represents the level of satisfaction that a consumer derives from consumption

14. 13 What is total utility? The total satisfaction a consumer derives from consumption

15. 14 What is marginal utility? The change in total utility derived from a one-unit change in consumption of a good

16. 15 What is the law of diminishing marginal utility? The more of a good consumed per period, the smaller the increase in total utility from consuming one more unit

17. 16 Utility Derived from Drinking Water after Jogging Four Miles Units of Water 0 1 2 3 4 5 Total Utility 0 40 60 70 75 73 Marginal Utility 0 40 20 10 5 -2 Exhibit 1

18. 17 (a) Total Utility and You Derive from Drinking Water after Jogging Four Miles 60 40 20 0 1234 5 Total Utility Glasses (8-ounce) Exhibit 2

19. 18 (b) Marginal Utility You Derive from Drinking Water after Jogging Four Miles 60 40 20 0 1234 5 Marginal Utility Glasses (8-ounce) Exhibit 2

20. 19 Total and Marginal Utility from Food Units of Food Consumed per Period 0 1 2 3 4 5 6 Total Utility of Food 0 25 41 53 62 68 72 Marginal Utility of Food - 25 16 12 9 6 4 Marginal Utility of Food per Dollar Expended (price = $4) - 6¼ 4 3 2¼ 1½ 1

21. 20 Total and Marginal Utility from Clothing Units of Clothing Consumed per Period 0 1 2 3 4 5 Total Utility of Clothing 0 20 34 44 50 54 Marginal Utility of Clothing - 20 14 10 6 4 Marginal Utility of Clothing per Dollar Expended (price = $2) - 10 7 5 3 2

22. 21 What is consumer equilibrium? The condition in which an individual consumer’s budget is completely spent and utility is maximized

23. 22 If you are hungry, how much food will you eat? Up to the point where MU = P

24. 23 Why? Because if MU> P, you will buy more food. If MU< P, you will not buy the last unit of food

25. 24 When is your total utility maximized? When your budget is completely spent and the last dollar spent on each good yields the same marginal utility

26. 25 Why does MU = P explain the downward sloping demand curve?

27. 26 a b D $4 $3 $2 0 4321 Demand for Pizza Generated from Marginal Utility MU = $4 MU = $3

28. 27 What is marginal valuation? The dollar value of the marginal utility derived from consuming each additional unit of a good

29. 28 What is consumer surplus? The difference between the maximum amount a consumer is willing to pay and what the consumer actually pays

30. 29 What is the consumer surplus of buying a pizza? The value of the total utility you receive from consuming the pizza minus your total spending on the pizza.

31. 30 D Consumer Surplus $7 $6 $5 $4 $3 $2 $1 12345 Price per pizza Price of pizza equals $3

32. 31 Consumer Surplus P Q D

33. 32 $6 $4 $2 2 4 6 dAdA Price per pizza Pizzas per month (a) Consumer A $6 $4 $2 2 4 6 dBdB Price per pizza Pizzas per month (b) Consumer B $6 $4 $2 2 4 6 dCdC Price per pizza Pizzas per month (c) Consumer C D $6 $4 $2 2 4 6 d A +d B +d C Price per pizza Pizzas per month (d) Market Demand Exhibit 7

34. 33 D Market Demand & Consumer Surplus $7 $6 $5 $4 $3 $2 $1 123456 Price per pizza Price of pizza equals $3

35. 34 What does time have to do with MU? People will have a greater MU the shorter the time

36. 35 What is an example of time and MU? People will be willing to pay more to fly to California from Virginia than they would be willing to pay to take a bus to California

37. 36 END