Chapter 19 - The logic of individual choice: The foundation of supply and demand. After reading this chapter, you should be able to: Discuss the principle of diminishing marginal utility and the principle of rational choice; explain the relationship between marginal utility and price when a consumer is maximizing total utility; summarize how the principle of rational choice accounts for the laws of demand and supply;. | Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter Goals Discuss the principle of diminishing marginal utility and the principle of rational choice Explain the relationship between marginal utility and price when a consumer is maximizing total utility Name three assumptions of the theory of choice and discuss why they may not reflect reality Summarize how the principle of rational choice accounts for the laws of demand and supply 2 Rational Choice Theory According to this theory, two things determine what people do: Utility, which is the pleasure people get from doing or consuming something According to traditional economists, our behavior is motivated by rational self interest The price of doing or consuming that something 3 Total Utility and Marginal Utility Marginal utility is the satisfaction you get from the consumption of one additional unit of the product above and beyond what you have consumed up to that point Utility = Satisfaction Total utility is the total satisfaction one gets from consuming a product 4 Diminishing Marginal Utility As additional units are consumed, marginal utility decreases, but total utility continues to increase When total utility is at a maximum, marginal utility is zero The principle of diminishing marginal utility states that after some point, the marginal utility received from each additional unit of a good decreases with each additional unit consumed Beyond this point, total utility decreases and marginal utility is negative 5 Rational Choice and Marginal Utility Any choice that does not give you as many units of utility as possible for the same amount of money is an irrational choice According to the basic principle of rational choice, people spend their money on those goods that give them the most marginal utility per dollar Rational individuals want as much satisfaction as they can get from their available resources 6 Maximizing Utility and Equilibrium The utility maximizing . | Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter Goals Discuss the principle of diminishing marginal utility and the principle of rational choice Explain the relationship between marginal utility and price when a consumer is maximizing total utility Name three assumptions of the theory of choice and discuss why they may not reflect reality Summarize how the principle of rational choice accounts for the laws of demand and supply 2 Rational Choice Theory According to this theory, two things determine what people do: Utility, which is the pleasure people get from doing or consuming something According to traditional economists, our behavior is motivated by rational self interest The price of doing or consuming that something 3 Total Utility and Marginal Utility Marginal utility is the satisfaction you get from the consumption of one additional unit of the product above and beyond what you have consumed up to that point Utility = .
