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Chapter 11: Income Inequality and Poverty

Chapter 11: Income Inequality and Poverty. Pages 252-254 Consumer Behavior and Utility Maximization. Chapter Objectives. Total Utility, Marginal Utility, and the Law of Diminishing Marginal Utility

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Chapter 11: Income Inequality and Poverty

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  1. Chapter 11: Income Inequality and Poverty Pages 252-254 Consumer Behavior and Utility Maximization

  2. Chapter Objectives • Total Utility, Marginal Utility, and the Law of Diminishing Marginal Utility • How Rational Consumers Compare Marginal Utility-to-Price Ratios for Products in Purchasing Combinations to Maximize Total Utility • How to Derive the Demand Curve by Observing Behavior • How the Utility-Maximization Model Highlights Income and Substitution Effects of a Price Change • Budget Lines, Indifference Curves, Utility Maximization, and Demand Derivation in the Indifference Curve Model of Consumer Behavior

  3. G 19.1 O 19.1 Law of Diminishing Marginal Utility • Terminology • Utility • Total Utility • Marginal Utility • Marginal Utility and Demand Graphically…

  4. 30 20 Total Utility (Utils) ] ] ] ] ] ] ] 10 0 1 1 2 2 3 3 4 4 5 5 6 6 7 7 10 8 6 Marginal Utility (Utils) 4 2 0 -2 Law of Diminishing Marginal Utility Total Utility (1) Tacos Consumed Per Meal (2) Total Utility, Utils (3) Marginal Utility, Utils TR 0 10 18 24 28 30 30 28 0 1 2 3 4 5 6 7 10 8 6 4 2 0 -2 Units Consumed Per Meal Marginal Utility MU Units Consumed Per Meal

  5. Theory of Consumer Behavior • Consumer Choice and Budget Constraint • Rational Behavior • Preferences • Budget Constraint • Prices • Utility Maximizing Rule • Allocate Money Income so that Last Dollar Spent on Each Product Yields the Same Marginal Utility

  6. (3) Product B: Price = $2 (2) Product A: Price = $1 (b) Marginal Utility Per Dollar (MU/Price) (b) Marginal Utility Per Dollar (MU/Price) (a) Marginal Utility, Utils (a) Marginal Utility, Utils First Second Third Fourth Fifth Sixth Seventh 10 8 7 6 5 4 3 10 8 7 6 5 4 3 24 20 18 16 12 6 4 12 10 9 8 6 3 2 Theory of Consumer Behavior Numerical Example: Utility-Maximizing Combination of Products A and B Obtainable with an Income of $10 (1) Unit of Product Compare Marginal Utilities Then Compare Per Dollar - MU/Price Choose the Highest Check Budget - Proceed to Next Item

  7. (3) Product B: Price = $2 (2) Product A: Price = $1 (b) Marginal Utility Per Dollar (MU/Price) (b) Marginal Utility Per Dollar (MU/Price) (a) Marginal Utility, Utils (a) Marginal Utility, Utils First Second Third Fourth Fifth Sixth Seventh 10 8 7 6 5 4 3 10 8 7 6 5 4 3 24 20 18 16 12 6 4 12 10 9 8 6 3 2 Theory of Consumer Behavior Numerical Example: Utility-Maximizing Combination of Products A and B Obtainable with an Income of $10 (1) Unit of Product Again, Compare Per Dollar - MU/Price Choose the Highest Buy One of Each – Budget Has $5 Left Proceed to Next Item

  8. (3) Product B: Price = $2 (2) Product A: Price = $1 (b) Marginal Utility Per Dollar (MU/Price) (b) Marginal Utility Per Dollar (MU/Price) (a) Marginal Utility, Utils (a) Marginal Utility, Utils First Second Third Fourth Fifth Sixth Seventh 10 8 7 6 5 4 3 10 8 7 6 5 4 3 24 20 18 16 12 6 4 12 10 9 8 6 3 2 Theory of Consumer Behavior Numerical Example: Utility-Maximizing Combination of Products A and B Obtainable with an Income of $10 (1) Unit of Product Again, Compare Per Dollar - MU/Price Buy One More B – Budget Has $3 Left Proceed to Next Item

  9. (3) Product B: Price = $2 (2) Product A: Price = $1 (b) Marginal Utility Per Dollar (MU/Price) (b) Marginal Utility Per Dollar (MU/Price) (a) Marginal Utility, Utils (a) Marginal Utility, Utils First Second Third Fourth Fifth Sixth Seventh 10 8 7 6 5 4 3 10 8 7 6 5 4 3 24 20 18 16 12 6 4 12 10 9 8 6 3 2 Theory of Consumer Behavior Numerical Example: Utility-Maximizing Combination of Products A and B Obtainable with an Income of $10 (1) Unit of Product Again, Compare Per Dollar - MU/Price Buy One of Each – Budget Exhausted

  10. (3) Product B: Price = $2 (2) Product A: Price = $1 (b) Marginal Utility Per Dollar (MU/Price) (b) Marginal Utility Per Dollar (MU/Price) W 19.1 (a) Marginal Utility, Utils (a) Marginal Utility, Utils First Second Third Fourth Fifth Sixth Seventh 10 8 7 6 5 4 3 10 8 7 6 5 4 3 24 20 18 16 12 6 4 12 10 9 8 6 3 2 Theory of Consumer Behavior Numerical Example: Utility-Maximizing Combination of Products A and B Obtainable with an Income of $10 (1) Unit of Product Final Result – At These Prices, Purchase 2 of Item A and4 of B

  11. MU of Product B MU of Product A Price of B Price of A 16 Utils 8 Utils $1 $2 Theory of Consumer Behavior Algebraic Restatement: = = Optimum Achieved - Money Income is Allocated so that the Last Dollar Spent on Each Product Yields the Same Extra or Marginal Utility

  12. O 19.2 2 Quantity Demanded Price Per Unit of B Price of Product B 1 0 4 6 Quantity Demanded of B Deriving the Demand Curve Same Numeric Example: 4 $2 6 1 Income Effects Substitution Effects DB

  13. O 19.3 Applications and Extensions • DVDs and DVD Players • The Diamond-Water Paradox • The Value of Time • Medical Care Purchases • Cash and Noncash Gifts

  14. Criminal Behavior Last Word • Economic Analysis Offers Insights Into Property Crimes Such as Robbery, Burglary, and Auto Theft • Theory of a Rational Consumer • Buy Versus Steal Decision • Compare Marginal Utility of Item Versus Costs – Guilt, Fines, or Prison Time • Crime May Be Reduced by “Increasing” the “Price of Crime”

  15. law of diminishing marginal utility utility total utility marginal utility rational behavior budget constraint utility-maximizing rule income effect substitution effect Key Terms

  16. Next Chapter Preview… Public Goods and Market Failure Chapter 5!

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