190 Ch03 Demand and Consumer Behavior Economics ECONOMICS MANAGEMENT SCHOOL.TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY Ch03 Demand and Consumer Behavior
1907 04-2 3.1 Utility Utility =level of happiness or satisfaction associated with alternative choices If buying 3 copies of Microeconomics makes you happier than buying one shirt,then we say that the books give you more utility than the shirt. Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 04-2 3.1 Utility • Utility = level of happiness or satisfaction associated with alternative choices – If buying 3 copies of Microeconomics makes you happier than buying one shirt, then we say that the books give you more utility than the shirt
04-3 0 Total and marginal utility total utility -the level of happiness derived from consuming the good marginal utility -the additional utility that is received when an additional unit of a good is consumed change in total utility Marginal utility= change in quantity Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 04-3 Total and marginal utility • total utility - the level of happiness derived from consuming the good • marginal utility - the additional utility that is received when an additional unit of a good is consumed
190 04-4 Law of diminishing MU law of diminishing marginal utility marginal utility declines as more of a particular good is consumed in a given time period. even though marginal utility declines,total utility still increases as long as marginal utility is positive.Total utility will decline only if marginal utility is negative Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 04-4 Law of diminishing MU • law of diminishing marginal utility - marginal utility declines as more of a particular good is consumed in a given time period. • even though marginal utility declines, total utility still increases as long as marginal utility is positive. Total utility will decline only if marginal utility is negative
04-5 Ordinal Versus Cardinal Utility Ordinal Utility Function:places market baskets in the order of most preferred to least preferred, but it does not indicate how much one market basket is preferred to another. Cardinal Utility Function:utility function describing the extent to which one market basket is preferred to another. Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 04-5 Ordinal Versus Cardinal Utility Ordinal Utility Function: places market baskets in the order of most preferred to least preferred, but it does not indicate how much one market basket is preferred to another. Cardinal Utility Function: utility function describing the extent to which one market basket is preferred to another
190 04-6 Ordinal Versus Cardinal Rankings The actual unit of measurement for utility is not important. Therefore,an ordinal ranking is sufficient to explain how most individual decisions are made. Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 04-6 Ordinal Versus Cardinal Rankings The actual unit of measurement for utility is not important. Therefore, an ordinal ranking is sufficient to explain how most individual decisions are made
04-7 equimarginal principle 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 MU of product A MU of product B Price of A Price of B Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 04-7 equimarginal principle 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 MU of product A Price of A MU of product B Price of B =
1907 04-8 OA卫B==...MUe 卫A PB per$of income Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 04-8 MU per $ of income
04-9 0 砂 Diamond-water paradox As noted by Adam Smith,water is essential for life and has a low market price (often a price of zero)while diamonds are not as essential yet have a very high market price. Economics ECONOMICS MANAGEMENT SCHOOL.TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 04-9 Diamond-water paradox • As noted by Adam Smith, water is essential for life and has a low market price (often a price of zero) while diamonds are not as essential yet have a very high market price
04-10 MUw MUa MUw MUd Quantity of water Quantity of diamonds Because individuals consume a large volume of water,the marginal utility of an additional unit of water is relatively low.Since few diamonds are consumed,the marginal utility of an additional diamond is relatively high. Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 04-10 Because individuals consume a large volume of water, the marginal utility of an additional unit of water is relatively low. Since few diamonds are consumed, the marginal utility of an additional diamond is relatively high
