Chapter Six: Consumer Choice: Individual and Market Demand
Scarcity and Demand Demand is action by consumers - Willing and able to pay the price The scarcity of income is a reason why less affluent consumers demand less Consumer purchases are interdependent Partial analysis all other variables dont change Utility: A Tool to Analyze Purchase Decisions Utility Satisfaction Each consumer spends income in the way that yields the greatest satisfaction Hamburgers vs. Movies example Total Versus Marginal Utility Total Utility: the largest sum of money that person will voluntarily give up in exchange for those goods Marginal Utility: maximum amount of money the consumer is willing to pay for one or more good How much additional pleasure received by eating one more pizza? The additional price The Law of Diminishing Marginal Utility Law of Diminishing Marginal Utility: Additional units of a commodity are worth less and less to a consumer in money terms. As the individuals consumption increases, the marginal utility of each additional unit declines. The more of a good a consumer has, the less marginal utility an additional unit contributes to overall satisfaction Hierarchy of uses for a commodity Pizza satisfies less of your needs Addiction want more of a good Mostly marginal utility declines as consumption increases When a commodity is scarce, it has high marginal utility, even though it may have little total utility because people have so little of the item Using Marginal Utility: The Optimal Purchase Rule Ex. The new utility each pizza yields: - Total utility you get from that number of pizzas, minus the utility you would lose by having to pay for them. Marginal Analysis: - Rule One: If marginal net utility is positive, consumer isnt buying enough. Because marginal utility exceeds price, total net utility increases by buying one more unit. Positive marginal utility is going up the hill. - Rule Two: No purchase quantity for which marginal net utility is a negative number can ever be optimal. In such a case, a buyer can get a higher total net utility by cutting back the purchase quantity. Best: MU = P or MU-P=O Optimal Purchase Rule It always pays the consumer to buy more of any commodity whose marginal utility (measured in money) exceeds its price, and less of any commodity whose marginal utility is less than its price. When possible, the consumer should buy the quantity of each good at which price (p) and marginal utility (MV) are exactly equal, that is, at which MU=P. These purchases max total net utility Marginal utility is subjective and reflects consumer tastes Adjust purchase quantities to equal market price From Diminishing Marginal Utility to Downward-Sloping Demand Curves Price down, quantity up
Consumer Choice as a Trade Off: Opportunity Cost How much of one commodity to buy? Opportunity cost = True cost Car vs. College? Consumers Surplus: The Net Gain From a Purchase Consumers Surplus: The willing pay minus the actual results in a difference to the net gain in total utility that a purchase brings to a buyer. Consumers Surplus = Total utility (in money terms) total expenditure Every purchase must yield consumer surplus Add the marginal net utility to find total surplus Graphically draw a demand curve as a set of bars with a horizontal line as the price of the good. Sum above the price line is total consumers surplus. Scarcity raises price and marginal utility, but it generally reduces total utility. Although total utility measures the benefits consumers get from their consumption, it is marginal utility that is equal (approximately) to price Indifference curve is a line connecting all combinations of the commodities that are equally desirable to the consumer. Map of personal choice and satisfaction derived. Income and Quantity Demanded Inferior Goods: Quantity demanded goes down when income goes up A rise in income can increase or decrease the purchase of a good Normal good Income up, demand up From Individual Demand Curves to Market Demand Curves Market Demand Curve: Shows how the quantity demanded by all consumers changes as the price changes Market Demand as a Horizontal Sum Add quantity demanded for each consumer at a price The Law of Demand Price up, demand down There are exceptions, but fair weather consumers are the cause of law of demand Market curve is down even when individual curves arent Exceptions to the Law of Demand: Price and quality Status