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utility and demand.docx

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University of Waterloo
ECON 101
Wokia Kumase

Oct 16 Utility and demand Scarce: consumers have limited income and budget but they need a lot of things. So how can the consumers make the best choice? PPF: the relationship between quantity and price(how change in price influences the quantity demanded) Governments(policy makers) need to understand how the consumers spend their income.. How they buy goods... 1. Consumption choices Choices are influenced by mainly two factors:(1) consumption possibilities (2)preferences (1) consumption possibilities are all the things you can afford ~ consumption possibilities are limited by the income ~ the limit of consumption possibilities can be described by budget line(very similar to PPF) The intersects with x-axis and y-axis are the largest amount you can afford for 2 particular goods Inside the budget line: things we can afford to buy.(affordable) Outside the budget line: things we can not afford to buy.(unaffordable) On the budget line: maximize the utility Assumption: consumers believe that more is always better. So if we want to achieve maximum utility, we need to consume more. Given the income and price of goods, we can write the equation of the budget line. P1+P2=Income(spend all your income) the slope of the budget line=(-P1)/P2 . If income changes, price of goods unchanged, the slope will remain the same. But if the price of goods changes, the income unchanged, the slope may change. (2) Preferences Benefit or satisfaction from con
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