Matakuliah
Tahun
: J0114-Teori Ekonomi
: 2009
CONSUMER BEHAVIOR AND UTILITY
MAXIMIZATION
Pertemuan 17
Law of Diminishing Marginal Utility
Terminology
– Utility is the benefit or satisfaction a person
receives from consuming a good or a services
– Total Utility is total amount of of satisfaction or
pleasure a person derives from consuming some
specific
– Marginal Utility is the extra satisfaction
aconsumer realizes from and additional unit of that
product
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3
Law of Diminishing Marginal Utility
Total Utility
(1)
(2)
(3)
Tacos
Total Marginal
Consumed Utility, Utility,
Per Meal Utils
Utils
1
2
3
4
5
6
7
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0
]
10
]
18
]
24
]
28
30 ]
30 ]
28 ]
10
TR
20
10
0
8
1
6
4
2
0
-2
Marginal Utility (Utils)
0
Total Utility (Utils)
30
10
8
6
4
2
0
-2
2
3
4
5
6
Units Consumed Per Meal
7
Marginal Utility
MU
1
2
3
4
5
6
Units Consumed Per Meal
7
4
Theory of Consumer Behavior
• Consumer Choice and Budget Constraint
– Rational Behavior
– Preferences
– Budget Constraint
– Prices
• Utility Maximizing Rule
– Allocate Money Income so that Last Dollar
Spent on Each Product Yields the Same
Marginal Utility
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5
Theory of Consumer Behavior
Numerical Example:
Utility-Maximizing Combination of Products A and B
Obtainable with an Income of $10
(3)
Product B:
Price = $2
(2)
Product A:
Price = $1
(1)
Unit of
Product
First
Second
Third
Fourth
(a)
Marginal
Utility,
Utils
(b)
Marginal
Utility
Per Dollar
(MU/Price)
10
8
10
8
7
7
(a)
Marginal
Utility,
Utils
(b)
Marginal
Utility
Per Dollar
(MU/Price)
10
24
18
10
12
16
8
9
Fifth
Sixth
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Seventh
Final Result – At These Prices,
Purchase 2 of Item A and 4 of B
6
Theory of Consumer Behavior
Algebraic Restatement:
MU of Product A
Price of A
8 Utils
$1
=
=
MU of Product B
Price of B
16 Utils
$2
Optimum Achieved - Money Income is
Allocated so that the Last Dollar Spent on
Each Product Yields the Same Extra or
Marginal Utility
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7
Deriving the Demand Curve
Same Numeric Example:
Price Per Quantity
Unit of B Demanded
$2
1
4
6
Price of Product B
2
1
Income Effects
Substitution Effects
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DB
0
4
6
Quantity Demanded of B
8
Applications and Extensions
• DVDs and DVD Players
• The Diamond-Water Paradox
O 19.3
• The Value of Time
• Medical Care Purchases
• Cash and Noncash Gifts
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Indifference Curve Analysis
Units of A Units of B
Total
(Price = $1.50)
(Price = $1)
Expenditure
8
6
4
2
0
0
3
6
9
12
$12
12
12
12
12
12
10
Quantity of A
• Budget Line (Constraint)
– Income Changes
– Price Changes
Income = $12
PA = $1.50
8
(Unattainable)
6
Income = $12
PB = $1
4
2
0
(Attainable)
2
4
6
8
10
12
Quantity of B
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Indifference Curve Analysis
• What is Preferred
– Downsloping
– Convex to Origin
– Marginal Rate of Substitution
(MRS)
12
j
Combination Units of A Units of B
j
12
2
k
6
4
l
4
6
m
3
8
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Quantity of A
10
8
k
6
l
4
m
2
0
I
2
4
6
8
Quantity of B
10
12
11
Indifference Curve Analysis
• The Indifference Map
• Equilibrium Position at Tangency
12
Quantity of A
10
PB
MRS =
PA
8
6
W
Preferred –
But Requires
More Income
X
4
I4
2
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0
I3
I1
2
4
6
8
Quantity of B
10
I2
12
12
Derivation of the Demand Curve
• Measurement of Utility
12
Quantity of A
10
8
Marginal Utility
of A
6
Price of A
X
4
2
I2
Price of B
0
2
4
6
8
10
Quantity of B
12
$1.50
1.00
DB
.50
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1 2 3 4 5 6 7 8 9 1011 12
Quantity of B
I3
=
Marginal Utility
of B
Price of B
At $1 Price for B,
6 Units are Purchased
Record the Results
As Price of B Increases to
$1.50,
Only 3 Units of B are
Bought
Record the Results
Connect the Points to
Create the Demand Curve13