AG ECON 200

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AG ECON 200

• PART 3 CONSUMER DECISIONS
• WK 3-3 CONSUMER BEHAVIOR UTILITY

Econ 200 Study Group W _at_1 IN SK 212, Th _at_11 IN
SK 201
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ECONOMICS
ECON PROCESS
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ECON SYSTEM
BUSINESS FORMS
MACROECONOMICS
FORMS OF COMPETITION
MICROECONOMICS
TRADITIONAL
COMMAND
SOCIALISM
CAPITALISM
RECESSION
PROPRIORSHIP
INFLATION
CONSUMER
CORPORATION
PARTNERSHIP
COMMUNISM
MARKET
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PART 3 CONSUMER DECISIONS
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• WK 3-3 CONSUMER BEHAVIOUR UTIL
• WK 3-4 ISO-UTIL CURVES BUGET LINES
• WK 3-5 INDIVIDUAL MARKET DEMAND
• WK 4-1 CHG IN DEMD QUANT DEMANDED
• WK 4-2 PRICE ELASTICITY OF DEMAND
• WK 4-3 INCOME CROSS ELASTICITY
• WK 4-4 CONSUMER SURPLUS AGG DEMAND
• WK 4-5 MIDTERM 1

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WK 3-3 CONSUMER BEHAVIOR UTILITY
LEARNING OBJECTIVES
AFTER THE DISCUSSION, THE STUDENT SHOULD BE ABLE
TO 1. DEFINE THE CONCEPT OF UTILITY
2. DEFINE DIMINISHING MARGINAL UTILITY 3.
CALCULATE MARGINAL UTILITY 4. DETERMINE THE
OPTIMUM ALLOCATION BASED ON UTILITY
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I. CONSUMER BEHAVIOR ASSUMPTIONS
DEFINE THE CONCEPT OF UTILITY
OBJ
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• A. OPPORTUNITY COST AND PRICE
• THE CONSUMER WILL ____________
• A PRODUCT SO LONG AS THE __________ CREATED BY
  ITS CONSUMPTION IS ___________ THAN THE
  ______________COST OF CONSUMING IT

PURCHASE
UTILITY
GREATER
OPPORTUNITY
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B. RATIONAL BEHAVIOR
DEFINE THE CONCEPT OF UTILITY
OBJ
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• IT IS ASSUMED THAT THE CONSUMER BEHAVES
  ECONOMICALLY _______________
• 1. CONSUMER WILL CONSUME A GOOD IF THE
  __________OF CONSUMING IT IS GREATER THAN THE
  ________OF ACQUIRING IT
• 2. _______IS BETTER THAN ________
• 3. OUR WANTS ARE ____________

RATIONALLY
UTILITY
COST
MORE
LESS
UNLIMITED
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THE CONSUMER IS ABLE TO ESTABLISH A SET OF
_________________BETWEEN ANY TWO GOODS AT ANY
TIME BASED UPON _________
DEFINE THE CONCEPT OF UTILITY
OBJ
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C. PREFERENCES
PREFERENCES
UTILITY

• D. BUDGET CONSTRAINT

THE CONSUMER IS _____________ IN THEIR PURCHASES
BY A _________ BUDGET
CONSTRAINED
LIMITED
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E. PURCHASING VS CONSUMING
DEFINE THE CONCEPT OF UTILITY
OBJ
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• SOME PEOPLE GAIN ________FROM THE ACT OF
  ______________, IN ADDITION TO THE UTILITY OF
  ________________

UTILITY
PURCHASING
CONSUMPTION
F. UTILITY MAXIMIZATION
IT IS ASSUMED EACH CONSUMER WILL BEHAVE IN A WAY
SO AS TO __________ THEIR UTILITY.
MAXIMIZE
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II. UTILITY OF ONE ITEM
DEFINE THE CONCEPT OF UTILITY
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• A. REVIEW
• 1. WHAT ARE THE 4 KINDS OF UTILITY?

1. FORM
PROCESSING
2. PLACE
TRANSPORT
3. TIME
STORAGE
4. POSSESSION
2. HOW DID WE DEFINE UTILITY?

• USEFULNESS OR SATISFACTION

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B. QUESTIONS
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DEFINE THE CONCEPT OF UTILITY
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• 1. WOULD YOU GET THE SAME SATISFACTION FROM A CUP
  OF COFFEE AND A CAN OF POP ON A HOT SUMMER DAY?

NO
NO
HOW ABOUT A COLD WINTER DAY?
DIFFERENT ITEMS
WILL GIVE DIFFERENT UTILITY
CONCLUSION
IN DIFFERENT SITUATIONS
AT DIFFERENT TIMES.
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1
DEFINE THE CONCEPT OF UTILITY
OBJ
2. WOULD TWO PEOPLE GET THE SAME SATISFACTION
FROM THE SAME ITEM?
WOULD A CANDY BAR HAVE THE SAME
UTILITY
FOR A HOMELESS PERSON AND

• PERSON LEAVING A BANQUET?

CONCLUSION
DIFFERENT PEOPLE
WILL HAVE DIFFERENT UTILITY
ITEM
FOR THE SAME
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Interpersonal Utility Comparison
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DEFINE THE CONCEPT OF UTILITY
OBJ

• The utility obtained by one person cannot be
  scientifically or objectively compared with the
  utility obtained from the same thing by another
  person because utility is subjective.

IS UTILITY STRICKLY A PERSONAL THING?
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C. MEASUREMENT
447
1
DEFINE THE CONCEPT OF UTILITY
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SUBJECTIVE

• 1. UTILITY IS A ____________, ____________MEASURE
  OF

QUANTITATIVE
SATISFACTION
2. FOR INDIVIDUAL ITEMSA. CARDINAL MEASUREMENT
ABSOLUTE ON A RULER 2" IS TWICE AS FAR AS 1"

B. ORDINAL MEASUREMENT RELATIVE SOMETHING IS
BETTER THAN ANOTHER BUT NOT IN ABSOLUTE TERMS
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3. FOR ALL ITEMS
447
1
DEFINE THE CONCEPT OF UTILITY
OBJ
C. UTILITY IS MEASURED ORDINALLY
UTIL ARE AN ARTIFICIAL CONSTRUCT USED TO
MEASURE UTILITY
D. UTILITY IS FOR AN INDIVIDUAL ITEM IS
APPROXIMATED BY STANDARD OF VALUE

• A. TOTAL UTILITY IS THE SUMMATION OF UTILITY
  FROM INDIVIDUAL ITEMS

b. TOTAL UTILITY f( CONSUMPTION )
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II. MARGINAL UTILITY OF ONE ITEM
448
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OBJ
DEFINE DIMINISHING MARGINAL UTILITY
A. QUESTIONS 1. DOES EACH ADDITIONAL UNIT OF POP
GIVE YOU THE SAME ADDITIONAL SATISFACTION? NO

CANS OF POP
1 2 3 4 5 6 7
-2.0
0.0
6.5
8.5
10
3.5
9.5
UTIL PER CAN
10
38.0
36.0
19.5
28.0
34.5
38.0
TOTAL UTIL
2. DOES THE FIRST CAN HAVE THE SAME
THIRST QUENCHING SATISFACTION OF THE
FIFTH?
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4. IS TOTAL SATISFACTION (UTILITY) GOING UP?
448
2
OBJ
DEFINE DIMINISHING MARGINAL UTILITY
3. WHAT THINGS ARE CHANGING IN THE SITUATION?
a. CONSUMPTION
b. TOTAL UTILITY
c. UTILITY PER CAN
YES
5. HOW IS IT GOING UP WITH EACH ADDED UNIT?
GOING UP AT A DECREASING RATE
6. MARGINAL UTILITY IS THE
ADDED
UTILITY YOU GET FROM EACH SUCCESSIVE
UNIT OF CONSUMPTION
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B. PRESENTATION
448
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OBJ
DEFINE DIMINISHING MARGINAL UTILITY
7. WHAT IS THE RELATIONSHIP CONSUMPTION AND
MARGINAL UTILITY?
INVERSE
. AS YOU BUY MORE THE ADDED UTILITY
GOES DOWN WHAT HAPPENS TO AMOUNT
YOU ARE WILLING TO PAY FOR MORE UNITS?
GOES DOWN
1. FORMULA MARG UTIL ? TOTAL UTILITY ????
UNITS OF CONSUMPTION
2. TABLE
3. GRAPH
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447
CALCULATE MARGINAL UTILITY
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OBJ
TOT UTIL 0 50 80 105 125 141 155 167 178 186 193
195 191
CHG IN UTIL
MARG UTIL
0
50
gt
50

• TACO
• 0
• 1
• 2
• 3
• 4
• 5
• 6
• 7
• 8
• 9
• 10
• 11
• 12

CHG IN TACOS
1
1
0
0
CHG IN UTIL
50
80
30
50

CHG IN TACOS
2
1
1
30
25
UTILITY
20
16
14
12
11
8
7
2
-4
TACOS
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Total Utility, Marginal Utility, and the Law of
Diminishing Utility
447
CALCULATE MARGINAL UTILITY
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OBJ

• The law of diminishing marginal utility is based
  on the idea that if a good has a variety of uses
  but only one unit of the good is available, then
  the consumer will use the first unit to satisfy
  his or her most urgent want.

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447
CALCULATE MARGINAL UTILITY
OBJ
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C. CONCEPT
skip over table
1. MARGINAL UTILITY IS THE CHANGE IN TOTAL
UTILITY FOR EACH ADDITIONAL UNIT OF
CONSUMPTION, I.E.,
MARGINAL UTILITY CHNG IN TOT UTILITY
CHNG IN CONSUMPTION
2. IT IS THE PT SLOPE (DERIVATIVE) OF THE TOTAL
UTILITY CURVE
3. TYPICALLY a. IT IS NOT NEGATIVE
b. IT WILL DECREASE AS YOU BUY MORE
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III. LAW OF DIMINISHING MARGINAL UTILITY FOR ONE
ITEM
447
3
OBJ
DEFINE DIMINISHING MARGINAL UTILITY

• LAW OF DIMINISHING MARGINAL UTILITY AS YOU
  CONSUME MORE OF AN GOOD,
• THE ADDITIONAL UTILITY YOU RECEIVED FROM EACH
  ADDITIONAL UNIT WILL DECREASE
• I.E., AS YOU GET MORE , EACH ADDITIONAL UNIT
  IS WORTH LESS

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IV. MARGINAL VALUE
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OBJ
CALCULATE MARGINAL UTILITY
A. BENEFITS
1 PER UTIL

• WIDGET1 0 1 2 3 4 5 6

TOT UTIL 0 10 18 22 24 25 24
10
8
4
2
0
MARG UTIL
1
-1
MARG VAL
0
10
1
8
4
2
-1
B. COSTS
4 PER WIDGET (PRICE)
24
8
12
16
20
0
4
TOT COST
4
MARG COST
4
4
4
4
4
0
C. BENEFIT / COST RATIO
1.00 1
.251
2.501
BENEFITS
.501
-.251
2.00 1
COSTS
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QUESTIONS

• 1. WHY DOES THE MARGINAL UTILITY GO DOWN?

ANS PRINCIPLE OF DIMISHING MARGINAL UTILITY
2. IF YOU HAD 10 TO SPEND, HOW MANY WIDGETS1
WOULD YOU BUY?
ANS YOU CAN ONLY AFFORD TWO
3. IF YOU WON THE OHIO LOTTO, HOW MANY WIDGETS
WOULD YOU BUY?
ANS NO MORE THAN 3
IT IS NOT ECONOMICALLY RATIONAL FOR COST TO
EXCEED BENEFITS
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V. ALLOCATION OF RESOURCES BETWEEN GOODS BASED ON
UTILITY
DETERMINE THE OPTIMUM ALLOCATION OF TWO GOODS
BASED ON UTILITY
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OBJ
SOCIAL

• A. ECONOMIC IS THE _________ SCIENCE OF
  __________________
• SCARCE ______________________ TO MAXIMIZE
  ___________

ALLOCATING
RESOURCES
UTILITY
B. LIFE USES MORE THAN ONE _________ SO WE MUST
ALLOCATE OUR ___________________ AMONG SEVERAL
____________________
GOOD
SCARE RESOURCES
GOODS AND SERVICES
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WIDGET A 1 2 3 4 5
6 UTIL/1CST 2.50 2.00 1.01 0.50 0.25
-0.25
DETERMINE THE OPTIMUM ALLOCATION OF TWO GOODS
BASED ON UTILITY
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OBJ
3
5
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WIDGET B 1 2 3 4 5
6 UTIL/1CST 3.50 3.00 2.25 1.50 0.90
0.75
1
2
4
6
BUDGET 5
1st PURC 2nd PURC 3rd PURC 4th PURCH 5th
PURCH
WID B-1
WID B-2
WID A-1
WIDB-3
WID A-2
F. WHERE DO YOU PUT YOUR MONEY?
THE WIDGET WITH NEXT HIGHEST UTILITY RATIO
UNLIMITED BUDGET
6th PURCH
7th PURCH
8th PURCH
G. HOW MUCH MONEY DO YOU SPEND ON WIDGETS?
AS LONG AS UTILITY / COST RATIO IS ABOVE ONE
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SUMMARY
WK 3-3 CONSUMER BEHAVIOR UTILITY
A. RATIONAL CONSUMERS BUY THINGS BASED ON THEIR
UTILITY
B. UTILITY IS A ORDINAL, SUBJECTIVE MEASURE OF
SATISFACTION BASED ONTHE PERSON, ITEM, PLACE AND
TIME.
C. ADDITIONAL UNITS ARE WORTH LESS PRINCIPLE OF
DIM MARGINAL UTILITY
D. RATIONAL CONSUMERS WILL ALLOCATE LIMITED
RESOURCES AMONG CHOICES         BASED ON THE
HIGHEST MARGINAL UTILITY
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NEXT TOPIC
PART 3 CONSUMER DECISIONS

• CONSUMER UTILITY MAXIMIZATION WITH TWO GOODS