1. Chapter 20
Consumer Choice

2. Utility Theory Utility The want-satisfying power of a good or service
Basically, it’s another word for satisfaction
Purely subjective- you can’t measure my utility
Utility Analysis
The analysis of consumer decision making based on utility maximization
Utils
Unit used when talking about utility

3. Utility Total utility versus marginal utility
Total utility is total satisfaction from consumption.
Marginal utility is the additional satisfaction from consuming an additional unit.
Law of diminishing marginal utility
Marginal utility ultimately declines as a person consumes more and more of a good or service.

4. Utility Theory (cont'd)
Marginal (additional, incremental) Utility
The change in total utility due to a one-unit change in the quantity of a good or service consumed
No more
Donuts!
mmm…
Donuts
Maybe one more

5. Figure 20-1 Total and Marginal Utility of Downloading and Listening to Digital Music Albums

6. Figure 20-1 Total and Marginal Utility of Downloading and Listening to Digital Music Albums
As each album is listened to, enjoyment increases until this point
Total utility is
maximized...

7. Figure 20-1 Total and Marginal Utility of Downloading and Listening to Digital Music Albums
This graph shows
the decline of
marginal utility
…where marginal
utility equals zero.

8. Graphical Analysis (cont'd)
Observations
Marginal utility falls as more is consumed.
Marginal utility equals zero when total utility is at its maximum.
You couldn’t be any happier!

9. Newspaper Vending Machines versus Candy Vending Machines
How many people take more than one paper from the vending machine?
Why not dispense candy the same way?
The answer is found in the concept of diminishing marginal utility.
The utility for candy is
(in most cases)
greater than it is for
a newspaper

10. Optimizing Consumption Choices
Consumer Optimum
A choice of a set of goods and services that maximizes the level of satisfaction for each consumer, subject to limited income

11. If you spend your income wisely you can enjoy music and sandwiches!!!

12. How a Price Change Affects Consumer Optimum
The Substitution Effect
The tendency of people to substitute cheaper commodities for more expensive commodities
The Principle of Substitution
Consumers and producers shift away from goods and resources that become priced relatively higher in favor of goods and resources that are now priced relatively lower.

13. How a Price Change Affects Consumer Optimum
The substitution effect of a price change
A person will substitute among goods by buying less of a good when its price increases.

14. How a Price Change Affects Consumer Optimum
Purchasing Power
The value of money for buying goods and services
What happens to your purchasing power at Wal-Mart?

15. How a Price Change Affects Consumer Optimum (cont'd)
Real-Income Effect
The change in people’s purchasing power that occurs when, other things being constant, the price of one good that they purchase changes
When that price goes up (down), real income, or purchasing power, falls (increases). (Wal-Mart)

16. How a Price Change Affects Consumer Optimum
Question???
What do you think: Which would usually have more of an impact on your purchases—the substitution effect or the real-income effect?
Discuss this with your neighbor! NOW!!!

17. The Demand Curve Revisited
Question
How is the demand curve derived?
Answer
By assuming income, tastes, expectations, and the price of related goods are not changing as the price of the good changes

18. The Demand Curve Revisited (cont'd)
Marginal utility, total utility, and the diamond-water paradox
Water is essential to life but cheap.
Diamonds are not essential to life but expensive.

19. End of Chapter 20