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Chapter 8.docx

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University of Lethbridge
ECON 1010
Pascal Ghazalian

Chapter 8- Utility and Demand Consumption Choices - The choices you make as a buyer of good and services is influenced by many factors, which economists summarize as o Consumption possibilities o Preferences - Consumption possibilities are all the things that you can afford to buy. - We’ll study the consumption possibilities of Lisa, who buys only two good; movies and pop. A consumer’s budget Line - Consumption possibilities are limited by income, the price of a moive and the price of a pop. o When Lisa spends all of her income, she reaches the limits of her consumption possibilities. o Lisa’s budget line shows the limits of her consumption possibilities o Lisa has $40 to spend, the price of a movie is 48 and the price of a pop is $4 a case. o The table lists seven possible ways Lisa can spend her $40. o The graph plots these combinations of movies and pop o Lisa can afford any of the combinations from A to F o Some goods are indivisible and must be bought at whole units at the points marked o Other foods are diviable, and can be bought at any quantity o The line through a to F shows Lisa’s budget line. - The budget line is a constraint on Lisa’s budget choices - Lisa can afford any point on her budget line, or inside it. - Lisa can not afford any point ouside her budget line Preferences - The choice that Lisa makes depends on her preferences- her likes and dislikes - Her benefit or satisfaction from consuming a good or service is called a utility Total Utility - Total utility is the total benefit a person gets from the consumption of goods. Generally, more consumption gives more total utility Maximizing Utility - The table shows Lisa’s total utility schedule - Total utility from good increases as the quantity of the good increases. o As Lisa sees more movies month, her total utility form movies increases, and from pop decreases Marginal utility - Marginal Utility from a good is the change in total utility that results from a unit-increase in the quantity of the good consumed - As the quantity consumed of a good increases, the marginal utility from it decreases. - We call this decrease in marginal utitity as the quantity of the good consumed increases the diminishing marginal utility - Marginal utility from good decreases as the quantity of the good increases. o As the number of movies seen in a month increases, marginal utility from movies decreases - The graph illustrates Lisa’s total utility and marginal utility from pop. o Total utility from a pop increases as more pop is consumed o The bars along the total utility curve show the extra total totality (marginal utility) from each additional case of pop. - The bar graph illustrates diminishing marginal utility o As Lisa increases the quantity of pop she drinks, her marginal utility from pop diminishes Utility-Maximizing Choice - The key assumption is that the household chooses the consumption possibility that maximizes total utility - The direct way to find the utility-maximising choice is to make a table in a spread sheet to do the calculations o Find the just-affordable combinations  Lisa has $40 a month to spend  The price of a movie is $8 and pop $4  Each roc shoes a combination that exhausts Lisa’s $40 o Find the total utility for each just-affordable combination  When Lisa sees 1 movie and drinks 8 cases a month....  She gets 50 units of utilities from the 1 movie and 248 units of utility from the pop  Totaling 298 units o Consumer equilibrium  Lisa chooses the combination that gives her the highest total utility  Lisa maximises her total unitary when she sees 2 movies and drinks 6 cases of pop a month  Lisa get 90 units of totality from the movies and 225 from pop o The utility-maximizing combination is the consumer’s choice Choosing at the margin - A More natural way of finding the consumer equilibrium is to use the idea of choices made at the margin - Having made a choice, would spending a dollar more or a dollar less on a good bring more total utility. - Marginal utility is the increase in the total utility that results from consuming one more unit of the good - The Marginal utility of per dollar is the marginal utility from a good that results from spending one more dollar on it - The marginal utility per dollar equals the marginal utility from a good divided by its price - Calling the marginal utility from movies MUMand the price of a movie PMthen the marginal utilities from movies is MU / P m M - Calling the marginal utility of pop MP and price P . - Comparing MU / m anM MU / P wp caP determine whether Lisa has allocated her budget the way that maximizes her total utility Utility maximizing rule - A consumer’s total ability is maximized by the following rule: o Spend all available income o Equalize the marginal utility per dollar for all goods - Lisa marginal calculation o Each row of the table shows a just-affordable combination o Start by choosing a row-a point on the budget line. o In row B1  MU m P MMU / Pp P  Too much on movies, too little on pop o In row C1  MU / P = MU / P m M p P  Lisa maximizes her total ut
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