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Lecture Economics: The basics (2/e): Chapter 6 App - Michael Mandel

Chapter 6 App - Delving deeper into microeconomics. After reading the material in this chapter, you should be able to: Explain the role of utility maximization in consumer choice and use the concept of price elasticity, explain the role of cost minimization in producer decisions and use the concept of price elasticity of supply explain the incidence of a tax. | Appendix: Chapter 6 Delving Deeper Into Microeconomics McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives Explain the role of utility maximization in consumer choice and use the concept of price elasticity. Explain the role of cost minimization in producer decisions and use the concept of price elasticity of supply Explain the incidence of a tax. 6A- Consumer Choice The underlying explanation of the demand curve is based on the utility function. The utility function also tells us how much benefit a person gets from purchasing and consuming more of the same thing. Marginal utility is the added utility from consuming one more unit of a good. Diminishing marginal utility is the concept that marginal utility declines as consumption increases. 6A- The Utility Function of a Coffee Drinker Cups of Coffee in a Day Utility (Measured in Utils) Marginal Utility (Measured in Utils) 0 0 1 4 4 2 7 3 3 9 2 4 10 1 6A- Budget Constraint The utility function is not the only factor that determines what you buy and how much. Budget constraint is the combination of goods and services you are able to buy, given their prices and the amount of money you have available to spend. The budget constraint changes when prices and/or income changes. 6A- Example of Budget Constraint # of meals eaten out in month # of movies seen in month Price per meal Price per movie Cost of meals Cost of movies Total spending 3 0 $20 $10 $60 $0 $60 2 2 $20 $10 $40 $20 $60 1 4 $20 $10 $20 $40 $60 0 6 $20 $10 $0 $60 $60 6A- Utility Maximization The rational individual will select goods and services to maximize utility when subject to a budget constraint. Due to diminishing marginal utility, you are more likely to choose a combination of goods and services rather than one good. As a consumer, you are weighing the marginal utility of spending an extra dollar on one good or service versus another. 6A- Utility Maximization Consumers | Appendix: Chapter 6 Delving Deeper Into Microeconomics McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives Explain the role of utility maximization in consumer choice and use the concept of price elasticity. Explain the role of cost minimization in producer decisions and use the concept of price elasticity of supply Explain the incidence of a tax. 6A- Consumer Choice The underlying explanation of the demand curve is based on the utility function. The utility function also tells us how much benefit a person gets from purchasing and consuming more of the same thing. Marginal utility is the added utility from consuming one more unit of a good. Diminishing marginal utility is the concept that marginal utility declines as consumption increases. 6A- The Utility Function of a Coffee Drinker Cups of Coffee in a Day Utility (Measured in Utils) Marginal Utility (Measured in Utils) 0 0 1 4 4 2 7 3 3 9 2 4 10 1 6A- Budget .