Utility
Measure of the amount of satisfaction a person derives from something
Incorporates emotions nad senations
Universal measure that allows individuals to compare choices
Not typically comparable across individuals.
Utility Basics
Utility is hard to measure.
How can anything meaningful be said about the utility people experience
Observe hat people acutually do
The principle of revealed preference is that people's perferences can be determinded by observing their choices and behaviour
Unique to s epcififc choice of a particular person at one date.
Utility Functions
The principle of revealed preferences isn't feasible for analyzing how people make choices
Instead, a more formal method is required
Utility functions aid in systematically analyzing chioces
A Utility function is a formula for calculating the total ulity that a particular person derives form consuming s acombination of goods and services.
A bundle is a unique combination of goods and services that a person could choose to consume.
A utility function quantify perferences
Utility measurements are relative, not absolute
Marginal Utility
When people continue to engage in a activity or consume more of one or service, the utility from the next unit is not a s great as the last unit.
Marginal Unit is the change in total utility from consuming an additional unit ofa good or service
The principle of diminsihing merginal utility is that the additional utility gained from consuming successive units of a good or service tends to be smaller than the utility gained from the previous unit or service.
Sometimes, marginal utility becomes negative.
Diminishing marginal utility
Marginal utility measures the per unitutility from each scoop of ice cream
Budget Constraints
Maximizing Utility with constraints
People have many wants and are constrainted by the time and money avaible to them
There are trade-offs, many activities with different opportunity costs, so different utility
Rational people maximize utility within those constrainits by spending their resources on the bundle that yields that highest possible total utility
All possible combinations of goods and services a consumer can buy for a given income are provided by a budget constraint.
Consider the following economics model
Rational people
2 goods, concert tickets (30 Pc) and movie tickets (15 Pm)
Given income is 120=Y
First, find the budget constraint. (Y=Pm*M+Pc*C)
Consumer Behaviour
Responding to changes in income and prices
Income changes
>income= more goods and services affordable
<income = fewer goods and services affordable, reducing consumption.
Income Effect-change in consumption from increased wealth due to lower prices
Price changes
Substitution effect- consumption change caused by change In price
Veblen goods- goods people buy because they are flashy and expensive, showing others that they can afford flashy and expensive goods.
Utility and society
Common utility maximization misconception is that people are inward looking consumption machines; utility is subject to ency, status, kindness, emotions
Status utility comes from 2 sources:
Direct-effect of product onus
Effect others reactions to it have on us
Altruistic utility- motive for action in which utility increases because someone else's utility increases
Reciprocity utility- responding to anothers' action with a similar action.
Summary of Chapter 7
Utility is an imaginary measure of the amount of satisfaction a person gets from something. People get utility from things they can purchase but also from things that don't usually have a dollar value. People makes decsisions by choosing to do the things that they think will give them the most utility given all of the options. Economists use the term utility maximization to descrbe this method of decision making. They assume that people's perferences are demonstatrated through the choices that they makes, a concept known as revealed preference. We observe what people do and assume that they're something that gives them utility.
Budget constraint is a line that shows all the possible consumptions bundles available to a person given a fixed budget. The slope of the budget line is the same to the ratio of prices of the 2 goods. A rational person will max utility given the amount of goods they can afford.
An increase in a person's income will cause the budget line to shift out, allowing a consumer to buy more goods on average. A decrase in the income will cause a person to consume fewer goods on average.
A change in the price of goods can have 2 effects an optimal consumption. The change in consumption that results from increased effective wealth due to lower prices is called the income effect. When prices decrease, a consumer is able to afford larger quantities, just as if their income had increased. The sub effect describes the change in consumption that results from a change in the realtive price of goods. When one good becomes relately less expensive than another good, consumers will be inclined to buy more of it.
How much utility consumers get from a good can be influenced by how other perceive their choice Some people choose to consume expensive goods to signal to others that they can afford these goods. Utility can also be influenced by your fram e of reference, your's far more liekly to be happy with a salary if its what everyone else has.
Altruism is a motive for action in which a person's utility increases simply because someone else's utility increases. Reciprocity is the idea that some people get utility from punishing bad things nad rewarding good things
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