Thursday, October 26, 2006

Class handout for Consumer Theory

Lecture VI – Consumer Theory Chapter 8
Professor Matt Festa

I) Demand Curve slopes down. Why?
a) Income effect
b) Substitution effect
c) Diminishing marginal utility
d) Remember Utility is the satisfaction or enjoyment you gain from a product

II) Total vs Marginal Utility
a) Focus on graph on Page 130
b) Economics works on the Margin, whether the consumer will consume the extra good rather than something else (whether another good or leisure).
c) Relation to elasticities, the further out on the demand curve you are, the more elastic is the demand curve. This is because you are more sensistive to a product if you have already consumed a large quantity of it!

III) Theories of consumer behavior
a) Rational behavior
b) Preferences
c) Budget Constraint
d) Prices

IV) Marginal Unit per Dollar
a) The rule is that consumers will maximize her satisfaction when she allocates her money income so that the last dollar spent on product A, the last on product b, yield equal amount of marginal benefit.
b) If this does not hold then the consumer can attain more satisfication changing their behavior. Since they are rational they will do so.
c) Further explanation of substitution and income effect.

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