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Lecture 6

ECON101 Lecture Notes - Lecture 6: Neuroeconomics, Economic Surplus, Bounded Rationality

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Corey Van De Waal

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Paradox Resolved
- Resolved by distinguishing between total utility and marginal
- For water the price is low, total utility is large, and marginal
utility is small
- For diamonds the price is high, total utility is small, and
marginal utility is high
- BUT marginal utility per dollar is the same for water and
Value and Consumer Surplus
- Supply of water is perfectly elastic the quantity of water
consumed is large and the consumer surplus from water is large
- Supply of diamonds is perfectly inelastic the price is high and the
consumer surplus from diamonds is small
6.5 New Ways of Explaining Consumer Choices
Temperature: An Analogy
- Utility is similar to temperature
o Both are abstract concepts
o Both have units of measurement that are arbitrary
- The concept of utility helps us understand why people buy more
of a good when its price falls and why people buy more of most
goods when their income increases
- Recent approaches to explaining consumer choice in economics
include two relatively new research imperatives behavioural
economics and neuroeconomics
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