Consumer BehaviorMr. Bammel

Law of Diminishing Marginal Utility

The principle that the added satisfaction declines as a consumer acquires additional units of a given product;

We can buy as much of a product as our income allows, but the more we obtain the less we want more of it;

Remember Utility…the satisfaction or pleasure one gets from consuming a product;

Total Utility and Marginal Utility

Total means “total”

Marginal means “extra” of each additional unit;

Viewing the Graph

http://glencoe.com/sites/common_assets/advanced_placement/mcconnell_18e/interactive_graphs/7_1/auth.html

Shows how diminishing marginal utility supports the idea that price must decrease in order for quantity demanded to increase; consumers are behaving in manner of downsloping of demand curve;

Theory of Consumer Behavior

Assume the following for all consumers: Rational Behavior

Clear-cut preferences

A budget constraint

Prices exist in all products

Utility Maximizing Rule

To Maximize satisfaction, the consumer should allocate his or her money income so that the last dollar spent on each product yields the same amount of extra (marginal) utility;

When the consumer has “balanced his margins,” he is said to be in consumer equilibrium;

We must examine this in Marginal Utility per dollar, or MU/price;

Analysis of Data

At what point will Holly reach Utility Maximization of Apples and Oranges with an income of $10?

Algebraic Examination

This algebraic equation merely shows that the ratios be equal for the last dollar spent on product A and Product B;

MUx/Px = MUy/Py = MUz/Pz

Why divide by price? because you cannot compare a $1 apple with a $2 orange

dividing by price means that we are comparing a dollar's worth an apple with a dollar's worth of an orange