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Lecture 4

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Department
Economics (Arts)
Course
ECON 208
Professor
Irakli Japaridze
Semester
Summer

Description
Econ 208 Lecture #4 May 7, 2013 Administrative Notes ▯ Midterm: May 21, 2013 Chapter 6: Consumer Behaviour Marginal Utility and Consumer Choice ▯ Diminishing marginal utility ▯ Ceterus paribus – utility any consumer derives from successive units of a particular product is assumed to diminish as total consumption of product increases ▯ Marginal utility decreases as the level of consumption increases o Ex: someone who is starving will derive more happiness when given a slice of pizza than someone who has already had three slices of pizza Utility Schedule Movies Attended Per Month Total Utility Marginal Utility 0 0 1 30 30 (greatest increase) 2 50 20 3 65 15 4 75 10 5 83 8 6 89 6 7 93 4 8 96 3 9 98 2 10 99 1 (lowest increase) ▯ Total utility increases but marginal utility (the increment your happiness increases) decreases ▯ To calculate the slope of the line Total Utility of total utility, you use the tangent o Marginal utility is 200 exactly the slope as slope asks “by 100 increasing one unit (in this case it is an 0 increase in one film), how much will Total Utility 5 10 15 your utility increase?” Movies Attended Per Month ▯ Marginal utility = increase in utility/increase in units Marginal Utility o Ex: when you increase 30 from 0 to 2 and have a total utility of 50 then the marginal utility is 50/2=25 20 10 0 Tota0 Utility 5 10 15 Movies Attended Per Month Econ 208 Lecture #4 May 7, 2013 ▯ Ex: if you find water in the desert the first glass makes you extremely happy and the next glass might make you almost as happy as the first but not quite however after two litres you may decide that you do not want anymore o You will not pay as much for the 10 unit as you would for the first ▯ Ex: you will pay $10,000 for the first glass of water but only $3 for the 10 glass of water Maximising Utility ▯ Consumers must decide how to adjust their expenditure to maximize total utility ▯ Utility-maximizing consumers allocate expenditure so that the utility obtained from the last dollar spend on each product is equal o You want to get the most out of your dollar o Ex: when deciding on buying glasses or chalk you need to consider your overall happiness which is a combination of the happiness derived from buying glasses and the happiness derived from buying chalk ▯ When you buy your first 10 pieces of chalk your happiness increases by th 20 but by the time it comes to buying your 11 piece of chalk your happiness might only increase by 2 (22+0=22) however buying a pair of glasses might increase your happiness by 3 so you would choose to buy the glasses (20+3=23) ▯ You bought chalk first because the happiness you derived from chalk was greater than the happiness you bought for glasses but seeing as marginal utility decreases with consumption when the marginal utility of chalk is less than the marginal utility of glasses then you switch to buying glasses however when the marginal utility of buying glasses is once again less than buying chalk you switch back to buying chalk ▯ You want to spend money with the highest efficiency therefore you purchase the product that will give you the highest utility ▯ A person maximizes utility when you are indifferent to spending your last dollar on either product (will gain the same amount of happiness no matter where you spend your money) ▯ Sometimes you can return products therefore you must consider if the loss of happiness from returning product A will be greater or less than the happiness derived from buying product B th o Ex: if the marginal utility you gain from your 10 piece of chalk is 10 and the marginal utility you gain from glasses is 70 and the price of both products is equal th then you would be better off returning the 10 piece of chalk and using the money to buy the glasses so that your net happiness will be 60 (70-10=60) ▯ The initial allocation of funds was not utility maximizing Econ 208 Lecture #4 May 7, 2013 ▯ If marginal utility of chalk and marginal utility of glasses are equal then it would not be worth it to return the chalk as buying the glasses would being no further happiness ▯ When determining the best way to use your dollar, you need to incorporate price o Ex: if security A costs $5 and beings 100 utility wile security B costs $10 and brings 160 utility then you must compare the rate of return determined by utility/dollar (100/5=20 and 160/10=16) ▯ Ex: initially a consumer finds that the utility from their last dollar spent on coke is greater than the utility from spending their last dollar on burritos o Continually switch between buying coke and burritos until the marginal utility per dollar spent on coke is equal to the marginal utility per dollar spent on burritos ▯ When there are two products (Product X and Product Y) the utility maximising condition: o (MU X/PX=MU Y/PY) or (MUX/MU Y=PX /Y) ▯ In the second equation we see consumer adjusting consumption therefore the ratios of marginal utilities are in response to changes in subjective relative price The Consumer’s Demand Curve ▯ What happens when there is a change in a product’s price? o Ex: when the price of coke goes up then at the previous utility maximizing consumption bundle we have: ▯ MU X/MU Y< PX/PYseeing as the consumption of coke goes down due to increased price then the marginal utility of coke goes up thus incr
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