ECN 201 Principles of Microeconomics

ECN 201
Principles of Microeconomics
Instructor: Nabila Maruf
Independent University, Bangladesh
Lecture Note: 8
Chapter 8: Utility and Demand
Consumption Choices
Your consumption choices are influenced by many
factors.
Two broad headings:
• Consumption Possibilities
• Preferences
Consumption Possibilities
• Your consumption possibilities are all the things you can
afford to buy.
Consumption Choices
• The combinations of goods and services that you can
buy are limited by your income and the prices that you
must pay.
• For example: You might divide your income to pay for
soda and movies.
• For consumption possibilities, we consider a model
where a person buys only two items.
Consumption Choices
A Consumer’s Budget Line
• Given two items: Soda and Movies
• Consumption possibilities are limited by income and by
the prices of movies and soda.
• When Lisa spends all her income, she reaches the limit
to her consumption possibilities.
• We describe this limit with a budget line.
Consumption Choices
Budget Line: The limit to a household’s consumption
choices. It marks the boundary between those
combinations of goods and services that a household
can afford to buy and those that it cannot afford.
Figure 8.1 illustrates Lisa’s consumption possibilities.
Consumption Choices
Consumption Choices
Points A through F in the graph illustrate the
possibilities presented in the table.
The line passing through this point is Lisa’s budget
line.
The budget line constrains choices: It marks the
boundary between what is affordable and
unaffordable.
Lisa can afford all the points on the budget line and
inside it.
Points outside the line are unaffordable.
Consumption Choices
Changes in Consumption Possibilities
• Consumption possibilities change when income or price
change
• A rise in income shifts the budget line outward but
leaves its slope unchanged
• A change in a price changes the slope of the line.
• Goal: Predict the effect of such changes on consumption
choices.
• Budget line shows what is possible; preferences
determine which possibility is chosen.
Consumption Choices
Preferences
• The choice Lisa makes depends on her preferences.
• The goal of a theory of consumer choice is to derive the
demand curve from a deeper account of how consumers
make their buying plans.
• That is, explaining what determines demand and
marginal benefit.
• We use utility to explain this.
Consumption Choices
Utility is the benefit or satisfaction that a person gets
from the consumption of goods and services.
Two utility concepts:
• Total utility
• Marginal Utility
Consumption Choices
Consumption Choices
Total Utility
• The total benefit that a person gets from the
consumption of all the different goods and services is
called total utility.
• Total utility depends on the level of consumption – more
consumption generally gives more total utility.
Consumption Choices
Marginal Utility
• We define marginal utility as the change in total utility
that results from a one-unit increase in the quantity of a
good consumed.
• Marginal utility is positive, but it diminishes as the
quantity of a good consumed increases.
Positive Marginal Utility
• All the things that people enjoy and want more of
have a positive marginal utility.
Consumption Choices
• Some objects and activities can generate negative
marginal utility – and lower total utility.
• Example: Hard labor and polluted air have negative
marginal utility.
• But all the goods and services that people value have
positive marginal utility.
• Total utility increases as the quantity consumed
increases.
Consumption Choices
Diminishing Marginal Utility
• As Lisa sees more movies, her total utility from
movies increases but her marginal utility from
movie decreases.
• Same happens in case of soda.
• The tendency for marginal utility to decrease as the
consumption of a good increases is so general and
universal that it is know as the principle of
diminishing marginal utility.
Consumption Choices
Your Diminishing Marginal Utility
• The utility you will receive from the first can of soda will be
much higher than the utility from eleventh can of soda.
• Your marginal utility decreases as you keep on increasing
soda consumption.
Graphing Lisa’s Utility Schedules
• Figure 8.2(a) shows Lisa’s total utility from Soda. Her total
utility curve slopes upward.
• Figure 8.2(b) shows Lisa’s marginal utility from Soda. Her
marginal utility curve slopes downward as she consumes
more soda.
Consumption Choices

ECN 201 Principles of Microeconomics

Uploaded by

Copyright:

Available Formats

ECN 201 Principles of Microeconomics

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

ECN 201 Principles of Microeconomics

Uploaded by

Copyright:

Available Formats

ECN 201

You might also like