1 / 13

Understanding Utility Maximization and Marginal Utility Theory

Learn how utility maximization and the law of diminishing marginal utility shape consumer behavior, with insights on total utility and rational decision-making processes. Explore real-world applications and societal impacts.

Download Presentation

Understanding Utility Maximization and Marginal Utility Theory

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Chapter 7 Utility Maximization

  2. Law of Diminishing Marginal Utility • Law of diminishing marginal utility • As consumption of a good or service increases, the marginal utility obtained from each additional unit of a good or service decreases • Explains downward sloping demand curve LO1

  3. Terminology • Utility is the satisfaction one gets from consuming a good or service • Not the same as usefulness • Subjective • Difficult to quantify LO1

  4. Total Utility and Marginal Utility • Util is one unit of satisfaction or pleasure • Total utility is the total amount of satisfaction • Marginal utility is the extra satisfaction from an additional unit of the good • MU = ΔTU/ΔQ LO1

  5. 30 20 Total utility (utils) ] ] ] ] ] ] ] 10 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7 10 8 6 Marginal utility (utils) 4 2 0 -2 Total Utility and Marginal Utility Continued Total Utility (1) Tacos Consumed Per Meal (2) Total Utility, Utils (3) Marginal Utility, Utils TU 0 10 18 24 28 30 30 28 0 1 2 3 4 5 6 7 10 8 6 4 2 0 -2 MU LO1

  6. Theory of Consumer Behavior • Rational behavior • Preferences • Budget constraint • Prices LO2

  7. Utility Maximizing Rule • Utility maximizing rule • Consumer equilibrium • Consumer allocates his or her income so that the last dollar spent on each product yields the same amount of extra (marginal) utility • Algebraically, MU of product A MU of product B Price of A Price of B = LO2

  8. Numerical Example LO2

  9. Decision-Making Process LO2

  10. $2 Quantity Demanded Price per Orange Price per orange $1 DO 0 4 6 Quantity demanded of oranges Deriving the Demand Curve 4 $2 6 1 LO3

  11. Income and Substitution Effects • Income effect • The impact a price change has on a consumer’s real income • Substitution effect • The impact a price change has on a product’s relative expensiveness LO4

  12. Applications and Extensions • New products • iPad • Diamond-water paradox • Opportunity cost and time • Medical care purchases • Cash and noncash gifts LO5

  13. Criminal Behavior • The criminal attempts to maximize his or her total utility • Compares the marginal benefit with the marginal cost of the unlawful activity • Most people find the costs too high • For others, society imposes additional costs such as fines and imprisonment • Potential to reduce crime by increasing the cost of crime

More Related