The Law of Demand

Law of Diminishing Ma
rginal Utility
Total and Marginal Ut
ility
Theory of Consumer
Behavior

C H APT E R

Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide

Next
Slide

Consumer Behavior and

Utility Maximization

End
Show
8-1

Copyright McGraw-Hill/Irwin, 2005

THE LAW OF DEMAND

The Law of Demand

Law of Diminishing Ma
rginal Utility
Total and Marginal Ut
ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide
End
Show
8-2

Next
Slide

A Closer Look

The Income Effect

A lower price frees income

for additional purchases and vice versa

The Substitution Effect

A lower price relative to other
goods attracts new buyers and vice versa
Copyright McGraw-Hill/Irwin, 2005

The Law of Demand

Law of Diminishing Ma
rginal Utility
Total and Marginal Ut
ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide
End
Show
8-3

Next
Slide

LAW OF DIMINISHING
MARGINAL UTILITY

Utility Defined
Subjective Nature
Difficult to Quantify
Total Utility
Marginal Utility

graphically exam

Copyright McGraw-Hill/Irwin, 2005

TOTAL AND MARGINAL UTILITY

rginal Utility
Total and Marginal Ut
ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination

0
1

0
10

Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions

20
10

Marginal Utility (utils)

Key Terms

Previous
Slide

30
Total Utility (utils)

Tacos
Total Marginal
The Law of Demand consumed Utility, Utility,
Utils
Utils
Law of Diminishing Ma per meal

Next
Slide

End
Show

Copyright McGraw-Hill/Irwin, 2005

Units consumed per meal

10
8
6
4
2
0
-2
1

8-4

Units consumed per meal

TOTAL AND MARGINAL UTILITY

rginal Utility
Total and Marginal Ut
ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination

0
1

0
10

Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions

20
10

Marginal Utility (utils)

Key Terms

Previous
Slide

10

30
Total Utility (utils)

Tacos
Total Marginal
The Law of Demand consumed Utility, Utility,
Utils
Utils
Law of Diminishing Ma per meal

Next
Slide

End
Show

Copyright McGraw-Hill/Irwin, 2005

Units consumed per meal

10
8
6
4
2
0
-2
1

8-5

Units consumed per meal

TOTAL AND MARGINAL UTILITY

rginal Utility

Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions

0
1
2

0
10
18

20
10

Key Terms

Previous
Slide

10
8

Marginal Utility (utils)

Total and Marginal Ut

ility

30
Total Utility (utils)

Tacos
Total Marginal
The Law of Demand consumed Utility, Utility,
Utils
Utils
Law of Diminishing Ma per meal

Next
Slide

End
Show

Copyright McGraw-Hill/Irwin, 2005

Units consumed per meal

10
8
6
4
2
0
-2
1

8-6

Units consumed per meal

TOTAL AND MARGINAL UTILITY

rginal Utility

Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions

0
1
2
3

0
10
18
24

Key Terms

Previous
Slide

10
8
6

Next
Slide

End
Show

20
10

Marginal Utility (utils)

Total and Marginal Ut

ility

30
Total Utility (utils)

Tacos
Total Marginal
The Law of Demand consumed Utility, Utility,
Utils
Utils
Law of Diminishing Ma per meal

Copyright McGraw-Hill/Irwin, 2005

Units consumed per meal

10
8
6
4
2
0
-2
1

8-7

Units consumed per meal

TOTAL AND MARGINAL UTILITY

Total and Marginal Ut

ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide

0
1
2
3
4

0
10
18
24
28

Next
Slide

End
Show

10
8
6
4

Total Utility (utils)

rginal Utility

30
20
10

Marginal Utility (utils)

Tacos
Total Marginal
The Law of Demand consumed Utility, Utility,
Utils
Utils
Law of Diminishing Ma per meal

Copyright McGraw-Hill/Irwin, 2005

Units consumed per meal

10
8
6
4
2
0
-2
1

8-8

Units consumed per meal

TOTAL AND MARGINAL UTILITY

Total and Marginal Ut

ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide

0
1
2
3
4
5

0
10
18
24
28
30

Next
Slide

End
Show

10
8
6
4
2

Total Utility (utils)

rginal Utility

30
20
10

Marginal Utility (utils)

Tacos
Total Marginal
The Law of Demand consumed Utility, Utility,
Utils
Utils
Law of Diminishing Ma per meal

Copyright McGraw-Hill/Irwin, 2005

Units consumed per meal

10
8
6
4
2
0
-2
1

8-9

Units consumed per meal

TOTAL AND MARGINAL UTILITY

Total and Marginal Ut

ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide
End
Show
8 - 10

Next
Slide

0
1
2
3
4
5
6

0
10
18
24
28
30
30

10
8
6
4
2
0

Total Utility (utils)

rginal Utility

30
20
10

Marginal Utility (utils)

Tacos
Total Marginal
The Law of Demand consumed Utility, Utility,
Utils
Utils
Law of Diminishing Ma per meal

Units consumed per meal

10
8
6
4
2
0
-2
1

Copyright McGraw-Hill/Irwin, 2005

Units consumed per meal

TOTAL AND MARGINAL UTILITY

Total and Marginal Ut

ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide
End
Show
8 - 11

Next
Slide

0
1
2
3
4
5
6
7

0
10
18
24
28
30
30
28

Copyright McGraw-Hill/Irwin, 2005

10
8
6
4
2
0
-2

30
Total Utility (utils)

rginal Utility

TU

20
10

Marginal Utility (utils)

Tacos
Total Marginal
The Law of Demand consumed Utility, Utility,
Utils
Utils
Law of Diminishing Ma per meal

Units consumed per meal

10
8
6
4
2
0
-2

MU
1

Units consumed per meal

TOTAL AND MARGINAL UTILITY

Total and Marginal Ut

ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide
End
Show
8 - 12

Next
Slide

0
1
2
3
4
5
6
7

0
10
18
24
28
30
30
28

Copyright McGraw-Hill/Irwin, 2005

10
8
6
4
2
0
-2

30
Total Utility (utils)

rginal Utility

TU

20
10

Marginal Utility (utils)

Tacos
Total Marginal
The Law of Demand consumed Utility, Utility,
Utils
Utils
Law of Diminishing Ma per meal

Observe
Diminishing
Marginal
Utility

Units consumed per meal

10
8
6
4
2
0
-2

MU
1

Units consumed per meal

THEORY OF CONSUMER BEHAVIOR

The Law of Demand
Law of Diminishing Ma
rginal Utility
Total and Marginal Ut
ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide
End
Show
8 - 13

Next
Slide

Consumer Choice a
Budget Constrai

Rational Behavior
Clear-Cut Preferences
Subject to a Budget
Constraint
Responds to Price
Changes
Copyright McGraw-Hill/Irwin, 2005

THEORY OF CONSUMER BEHAVIOR

The Law of Demand
Law of Diminishing Ma
rginal Utility
Total and Marginal Ut
ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide
End
Show
8 - 14

Next
Slide

Utility Maximizing Rule

The consumers money

income should be allocated
so that the last dollar spent
on each product yields the
same amount of extra
(marginal) utility.
Copyright McGraw-Hill/Irwin, 2005

illustrated.

UTILITY MAXIMIZING COMBINATION

$ 10 income

The Law of Demand

Law of Diminishing Ma
rginal Utility
Total and Marginal Ut
ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide
End
Show
8 - 15

Next
Slide

Unit of
product

First

Product A:
Price = $1

Marginal
Marginal utility per
utility,
dollar
utils
(MU/price)

10

10

Product B:
Price = $2

Marginal
Marginal utility per
utility,
dollar
utils
(MU/price)

24

How should the $10

income be allocated?
Copyright McGraw-Hill/Irwin, 2005

12

UTILITY MAXIMIZING COMBINATION

$ 10 income

The Law of Demand

Law of Diminishing Ma
rginal Utility
Total and Marginal Ut
ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide
End
Show
8 - 16

Next
Slide

Unit of
product

First

Product A:
Price = $1

Marginal
Marginal utility per
utility,
dollar
utils
(MU/price)

10

10

Product B:
Price = $2

Marginal
Marginal utility per
utility,
dollar
utils
(MU/price)

24

12

Examine the two

marginal utilities
Copyright McGraw-Hill/Irwin, 2005

UTILITY MAXIMIZING COMBINATION

$ 10 income

The Law of Demand

Law of Diminishing Ma
rginal Utility
Total and Marginal Ut
ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide
End
Show
8 - 17

Next
Slide

Unit of
product

First

Product A:
Price = $1

Marginal
Marginal utility per
utility,
dollar
utils
(MU/price)

10

10

Product B:
Price = $2

Marginal
Marginal utility per
utility,
dollar
utils
(MU/price)

24

12

Examine the two

marginal utilities
per dollar
Copyright McGraw-Hill/Irwin, 2005

UTILITY MAXIMIZING COMBINATION

$ 10 income

The Law of Demand

Law of Diminishing Ma
rginal Utility
Total and Marginal Ut
ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide
End
Show
8 - 18

Next
Slide

Unit of
product

First

Product A:
Price = $1

Marginal
Marginal utility per
utility,
dollar
utils
(MU/price)

10

10

Product B:
Price = $2

Marginal
Marginal utility per
utility,
dollar
utils
(MU/price)

24

12

Decision: Buy 1
Product B for $2
Copyright McGraw-Hill/Irwin, 2005

UTILITY MAXIMIZING COMBINATION

$ 10 income

The Law of Demand

Law of Diminishing Ma
rginal Utility
Total and Marginal Ut
ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide
End
Show
8 - 19

Next
Slide

Unit of
product

Product A:
Price = $1

Marginal
Marginal utility per
utility,
dollar
utils
(MU/price)

Product B:
Price = $2

Marginal
Marginal utility per
utility,
dollar
utils
(MU/price)

First
10
10
24
Second 8
8
20
Third
7
7
18
Fourth What
6
6
16
next?
Fifth
5
5
12
Sixth
4
4
6
Seventh 3
3
4
Copyright McGraw-Hill/Irwin, 2005

12
10
9
8
6
3
2

UTILITY MAXIMIZING COMBINATION

$ 10 income

The Law of Demand

Law of Diminishing Ma
rginal Utility
Total and Marginal Ut
ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide
End
Show
8 - 20

Next
Slide

Unit of
product

Product A:
Price = $1

Marginal
Marginal utility per
utility,
dollar
utils
(MU/price)

Product B:
Price = $2

Marginal
Marginal utility per
utility,
dollar
utils
(MU/price)

First
10
10
24
12
Second 8
8
20
10
Third
7
7
18
9
Fourth What
6
6
16
8
next?
Fifth
5
5
12
6
Buy one of each
Sixth
4
4
6
3
Seventh 3
3
4
2
Copyright McGraw-Hill/Irwin, 2005

UTILITY MAXIMIZING COMBINATION

$ 10 income

The Law of Demand

Law of Diminishing Ma
rginal Utility
Total and Marginal Ut
ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide
End
Show
8 - 21

Next
Slide

Unit of
product

Product A:
Price = $1

Marginal
Marginal utility per
utility,
dollar
utils
(MU/price)

Product B:
Price = $2

Marginal
Marginal utility per
utility,
dollar
utils
(MU/price)

First
10
10
24
Second 8
8
20
Third
7
7
18
Fourth 6
6
16
and
then...
Fifth
5
5
12
($5 left)
Sixth
4
4
6
Seventh 3
3
4
Copyright McGraw-Hill/Irwin, 2005

12
10
9
8
6
3
2

UTILITY MAXIMIZING COMBINATION

$ 10 income

The Law of Demand

Law of Diminishing Ma
rginal Utility
Total and Marginal Ut
ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide
End
Show
8 - 22

Next
Slide

Unit of
product

Product A:
Price = $1

Marginal
Marginal utility per
utility,
dollar
utils
(MU/price)

Product B:
Price = $2

Marginal
Marginal utility per
utility,
dollar
utils
(MU/price)

First
10
10
24
Second 8
8
20
Third
7
7
18
Fourth 6
6
16
third
unit
of
Fifth
5
5
12
product
Sixth
4
4 B 6
Seventh 3
3
4
Copyright McGraw-Hill/Irwin, 2005

12
10
9
8
6
3
2

UTILITY MAXIMIZING COMBINATION

$ 10 income

The Law of Demand

Law of Diminishing Ma
rginal Utility
Total and Marginal Ut
ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide
End
Show
8 - 23

Next
Slide

Unit of
product

Product A:
Price = $1

Marginal
Marginal utility per
utility,
dollar
utils
(MU/price)

First
10
Second 8
Third
7
Fourth
6
$3 left...
Fifth
5
Sixth
4
Seventh 3
Copyright McGraw-Hill/Irwin, 2005

10
8
7
6
5
4
3

Product B:
Price = $2

Marginal
Marginal utility per
utility,
dollar
utils
(MU/price)

24
20
18
16
12
6
4

12
10
9
8
6
3
2

UTILITY MAXIMIZING COMBINATION

$ 10 income

The Law of Demand

Law of Diminishing Ma
rginal Utility
Total and Marginal Ut
ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide
End
Show
8 - 24

Next
Slide

Unit of
product

Product A:
Price = $1

Marginal
Marginal utility per
utility,
dollar
utils
(MU/price)

First
10
10
Second 8
8
Third
7
7
Fourth
6
6
$3 left...
Fifth
5
5
Buy
both!
Sixth
4
4
Seventh 3
3
Copyright McGraw-Hill/Irwin, 2005

Product B:
Price = $2

Marginal
Marginal utility per
utility,
dollar
utils
(MU/price)

24
20
18
16
12
6
4

12
10
9
8
6
3
2

UTILITY MAXIMIZING COMBINATION

$ 10 income

The Law of Demand

Law of Diminishing Ma
rginal Utility
Total and Marginal Ut
ility
Theory of Consumer
Behavior

Unit of
product

Product A:
Price = $1

Marginal
Marginal utility per
utility,
dollar
utils
(MU/price)

First
10
10
Second 8
8
Third
7
7
Income is gone...
the
last dollar 6
spent on
Fourth
6
each good gave the same
Fifth
5
5
utility (8) per dollar
Sixth
4
4
Seventh 3
3

Utility Maximizing C
ombination

Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide
End
Show
8 - 25

Next
Slide

Copyright McGraw-Hill/Irwin, 2005

Product B:
Price = $2

Marginal
Marginal utility per
utility,
dollar
utils
(MU/price)

24
20
18
16
12
6
4

12
10
9
8
6
3
2

UTILITY MAXIMIZING COMBINATION

The Law of Demand
Law of Diminishing Ma
rginal Utility
Total and Marginal Ut
ility

Algebraic Restatement of the

Utility Maximization Rule

Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions

MU of product A
Price of A

MU of product B
Price of B

Key Terms

8 Utils
Previous
Slide
End
Show
8 - 26

Next
Slide

$1
Copyright McGraw-Hill/Irwin, 2005

16 Utils
$2

The Law of Demand

Law of Diminishing Ma
rginal Utility
Total and Marginal Ut
ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide
End
Show
8 - 27

Next
Slide

UTILITY MAXIMIZATION AND

THE DEMAND CURVE
Deriving the Demand Schedule
and Curve
Given from the previous example schedule:

Preferences or Tastes
Money Income
Prices of Other Goods
Copyright McGraw-Hill/Irwin, 2005

The Law of Demand

Law of Diminishing Ma
rginal Utility
Total and Marginal Ut
ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide
End
Show
8 - 28

Next
Slide

UTILITY MAXIMIZATION AND

THE DEMAND CURVE
Deriving the Demand Schedule
and Curve
Create a demand schedule from the
purchase decisions as the price of
the product is varied ...
Price per unit of B
$2
1

Quantity Demanded
4
6

Graphically

Copyright McGraw-Hill/Irwin, 2005

The Law of Demand

Law of Diminishing Ma
rginal Utility
Total and Marginal Ut
ility

UTILITY MAXIMIZATION AND

THE DEMAND CURVE
Deriving the Demand Schedule
and Curve

Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide
End
Show
8 - 29

Price per unit of Good B

Theory of Consumer
Behavior

$2

DB

Next
Slide

0
Copyright McGraw-Hill/Irwin, 2005

Quantity Demanded of Good B

The Law of Demand

Law of Diminishing Ma
rginal Utility
Total and Marginal Ut
ility

Utility Maximizing C
ombination

Income
and
$2
Substitution Effects
Revisited
1

Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide
End
Show
8 - 30

Price per unit of Good B

Theory of Consumer
Behavior

UTILITY MAXIMIZATION AND

THE DEMAND CURVE
Deriving the Demand Schedule
and Curve

DB

Next
Slide

0
Copyright McGraw-Hill/Irwin, 2005

Quantity Demanded of Good B

APPLICATIONS AND EXTENSIONS

The Law of Demand
Law of Diminishing Ma
rginal Utility
Total and Marginal Ut
ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide
End
Show
8 - 31

DVDs and DVD Players

The Diamond-Water
Paradox
The Value of Time
Medical Care Purchases
Cash and Noncash Gifts

Next
Slide

Copyright McGraw-Hill/Irwin, 2005

income effect
substitution effect
utility
total utility
marginal utility
law of diminishing marginal utility
rational behavior
budget constraint
utility-maximizing rule
Copyright McGraw-Hill/Irwin, 2005

BACK

END

The Law of Demand

Law of Diminishing Ma
rginal Utility

Next

Total and Marginal Ut

ility
Theory of Consumer
Behavior
Utility Maximizing C
ombination
Utility Maximization
and the Demand Curv
e
Applications and Exte
nsions
Key Terms

Previous
Slide
End
Show
8 - 33

Next
Slide

Indifference Curve Analysis

Copyright McGraw-Hill/Irwin, 2005