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Chapter 4: Utility Maximization

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Kaye Anne Servigon

on 29 September 2012

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Transcript of Chapter 4: Utility Maximization

Consumer is the one who demands goods and services king in a capitalist or free-market economy Producers satisfy the needs and wants of consumers in order to earn profits 'passive agents' Consumer Sovereignty our power to determine what is produced since we are the ultimate purchaser of goods and services GOODS SERVICES refers to anything that provides satisfaction to the needs, wants, and desires of the consumer can be any tangible economic products (like cars, books, clothes, etc.) any intangible economic activities (such as hairdressing, catering, insurance, banking, telecommunications, etc.) that contribute directly or indirectly to the satisfaction of human wants Consumer Goods goods that yield satisfaction directly to any consumer
primarily sold for consumption and not to be used for further processing or as an input/raw material needed in producing another good ESSENTIAL/ NECESSITY GOODS LUXURY GOODS goods that satisfy the basic needs of man goods which men may do without and which are used to contribute to his comfort and well being ECONOMIC GOOD FREE GOOD both useful and scarce and has value attached to it and a price has to be paid for its use If a good is so abundant that there is enough of it to satisfy everyone's needs without anybody paying for it, that good is free. Consumers' Tastes and Preferences are determined by: AGE INCOME EDUCATION GENDER OCCUPATION CUSTOMS AND TRADITION CULTURE Brand is the name, term or symbol given to a product by a supplier in order to distinguish his offering from that of similar products supplied by competitors Physiological needs
These are the basic needs for sustaining human life itself, such as food, water, warmth, shelter, sex and sleep. Safety needs
These are the needs to be free of physical danger and the fear of losing ones work, property, food, or shelter. Social needs
These needs cover the value of the sense of belongingness, love, care, acceptance and understanding of family, relatives and friends, and to be accepted by others. Esteem needs
These needs explain the importance of self-esteem, recognition, status of an individual and the general acceptance of the society to an individual.
This kind of need produces such satisfaction as power, prestige, status, and self-confidence. Self-actualization needs
These needs explain the worth of a person's self-development, growth and realization and achievement.
According to Maslow, this is the highest need in the hierarchy.
It is the desire to become what is capable of becoming -- to maximize one's potential and to accomplish something. MASLOW'S HIERARCHY
OF NEEDS Utility Theory simply tries to explain how our satisfaction or utility as consumers decline when we try to consume more and more of the same good at a particular point in time Utility In economics, this refers to the satisfaction or pleasure that an individual or consumer gets from the consumption of a good or service that (s)he purchases. Marginal Utility is defined as the additional satisfaction that an individual derives from consuming an extra unit of a good or service.
Marginal means 'additional' or 'extra'.
is simply the change in total utility divided by the change in quantity Total Utility is the total satisfaction that a consumer derives from the consumption of a given quantity of a good or service in a particular time period Law of Diminishing Marginal Utility This Law states that as consumer gets more satisfaction in the long-run, he experiences a decline in his satisfaction for goods and services.
This means that consumption of more successive units of the same good increases total utility, but at decreasing rate because marginal utility diminishes. Chapter 4: Total Utility Curve (Convex Utility Curve) Marginal Utility Curve (Concave Utility Curve) Consumer Surplus is a measure of the welfare we gain from the consumption of goods and services, or a measure of the benefits that we derive from the exchange of goods
is the difference between the total amount that we are willing and able to pay for a good or service and the total amount that we actually pay for that good or service Consumer Behavior and Utility Maximization end of chapter 4...
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