ECON1101 Lecture Notes - Lecture 9: Demand Curve, Marginal Cost, Inferior Good

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19 May 2018

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Wednesday, 15 March 2017

Microeconomics

Perfectly Competitive Markets

-Utility: Satisfaction that an individual derives from consuming a given good or taking a

certain action - measured in utils

-Decreasing Marginal Utility: Captures fact that utility from consuming an extra unit of a

given good decreases with the number of units previously consumed

-Cost-Beneﬁt Principle: An action should be taken if marginal beneﬁt is greater than

marginal cost

-Quantity Demanded: (by a consumer) represents the quantity of a given good or

service that maximises utility experienced by the individual consuming it

-Demand Curve: Represents relationship between price of a good or service & the

quantity demanded of that good or service

-Law of Demand: Tendency for a consumer to demand more of a certain good or

service when price of that good or service decreases

•When price increases, other goods become relatively cheaper & individual

consumes more of them - substitution effect

•Increase in price makes individual poorer in terms of purchasing power - income

effect

•Substitution effect - captures change in quantity demanded of a given good

following a change in its relative price

•Income effect - captures changes in quantity demanded of a given good following

reduction in consumer’s purchasing power

-For normal goods, decrease in income decreases quantity consumed

-For inferior goods, decrease in income increases quantity consumed

•Substitution effect usually dominates:

-Increase in price causes decrease in overall quantity consumed

-Giffen goods - increase in price causes increase in overall quantity consumed

-Maximum amount of money a consumer is willing to pay for the marginal unit of the

good is known as the Consumer Reservation Price (Willingness to Pay)

•Reading demand curve vertically - ﬁnding price for a given quantity

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Document Summary

Utility: satisfaction that an individual derives from consuming a given good or taking a certain action - measured in utils. Decreasing marginal utility: captures fact that utility from consuming an extra unit of a given good decreases with the number of units previously consumed. Cost-bene t principle: an action should be taken if marginal bene t is greater than marginal cost. Quantity demanded: (by a consumer) represents the quantity of a given good or service that maximises utility experienced by the individual consuming it. Demand curve: represents relationship between price of a good or service & the quantity demanded of that good or service. For normal goods, decrease in income decreases quantity consumed. For inferior goods, decrease in income increases quantity consumed: substitution effect usually dominates: Increase in price causes decrease in overall quantity consumed. Giffen goods - increase in price causes increase in overall quantity consumed. Demand curve = mb curve (for consumer)

Related Questions

budget line

marginal utility

complete property of preferences

market demand

consumption bundle

substitution effect

Giffen good

total effect

income effect

transitive property of preferences

indifference curves

utility

the marginal rate of substitution

utility function

1.	_____	The satisfaction or benefit that consumers receive from consuming goods or services.
2.	________________ _	A particular combination of specific quantities of goods or services
3.	________________ _	Consumers can rank all conceivable bundles of goods or services
4.	_____	If A is preferred to B, and B is preferred to C, then A is always preferred to C.
5.	_____	Equation showing a consumerâs perception of the total utility forthcoming from consuming each bundle of goods and services.
6.	_____	A set of consumption bundles each and every one of which provides a consumer with exactly the same level of total utility.
7.	_____	The number of units of Y that must be given up for total utility to remain the same when one more unit of X is consumed.
8.	_____	The addition to total utility attributable to consuming one more unit of a good, holding the consumption of all other goods constant.
9.	_____	The line showing all bundles of goods that can be purchased at given prices if the entire income is spent.
10.	_____	The change in the consumption of a good that would result if the consumer remained on the original indifference curve after the price of the good changes.
11.	_____	The change in consumption of goods results strictly from the change in purchasing power after the price of a good changes.
12.	________________ _	The sum of the substitution and income effects.
13.	_____	A good for which quantity demanded varies directly with price, causing an upward sloping demand curve.
14.	_____	A list of prices and the corresponding quantity consumers are willing and able to purchase at each price.

blushwildebeest943

1. Economists use ____________ as a measure of the relative level of satisfaction when someone consumes a good or service.

2. Sue likes brownies. However, Sue notices that the more brownies she eats the less satisfaction she receives from each extra brownie. We can say that Sue is experiencing ___________________ from each extra brownie.

sugar sickness

total utility

diminishing marginal utility

increasing marginal utility

3. When total utility is maximized, the marginal utility will be

4. Consider Dirk and Lee. They are both eating pizza. Which of the following statements is true regarding their satisfaction and utility?

Dirk and Lee both receive 10 utils from eating pizza.

Dirk and Lee both receive the same level of satisfaction from eating pizza.

Dirk gets more twice as much satisfaction as Lee from eating pizza.

It is difficult to determine because the utility is subjective.

5. For many products, the total utility curve is

strictly increasing because of increasing marginal utility.

strictly decreasing because of diminishing marginal utility.

increasing initially because of increasing marginal utility, but eventually decreases.

increasing initially at a decreasing rate because of diminishing marginal utility but eventually decreases.

6. When consumers get the biggest bang for the buck, we say they

used the loudest gun in hunting season.

reached a consumer optimum.

minimized consumer satisfaction.

maximized marginal utility.

7. By choosing to consume at the consumer optimum, consumers will

maximize their total utility.

minimize their total utility.

maximize the amount they spend on each good.

minimize the amount they spend on each good.

8. A consumer is in equilibrium when consuming two goods when which of the following holds?

MU_a/ P_a = MU_b/ P_b

MU_a/ P_h =MU_b/ P_a

P_a/ MU_a = P_b/ MU_b

MU_a x P_a = MU_bxP_b

9. If the marginal utility of good 1 is 15 and its price is $3, and the marginal utility of good 2 is 12, and its price is $4, then the consumer

has achieved a consumer optimum.

should increase his or her consumption of good 1.

should increase his or her consumption of good 2.

should decrease his or her consumption of good 1.

10.Suppose the price of an iPod decrease and the price of HD TVs remains the same; what noticeable effect(s) occur(s)?

the substitution effect only

the real-income effect only

the substitution effect and real-income effect, if there is a noticeable change in purchasing power

the substitution effect and real-income effect, if there isnât a noticeable change in purchasing power

11. The ______________ paradox was described by Adam Smith in 1776.

12. What is the key to solving the diamond-water paradox?

more water and fewer diamonds

marginal utility

total utility

consumer demand

13. When solving the diamond-water paradox we notice that the marginal utility of

diamonds are equal to the marginal utility of water.

diamonds are greater than the marginal utility of water.

diamonds are less than the marginal utility of water.

water is equal to its price, and therefore lower than the marginal utility of diamonds.

14. The consumer surplus for water is

greater than that for diamonds because water is nonessential.

greater than that for diamonds because water is essential.

less than that for diamonds because water is nonessential.

less than that for diamonds because water is essential.

15. Suppose a consumer consumes only diamonds and water, and the price of diamonds increases. All else being equal, a consumerâs marginal utility for diamonds

decreases and the marginal utility for water stays the same.

increases and the marginal utility for water decreases.

decreases and the marginal utility for water increases.

increases and the marginal utility for water stays the same.