MGEA02H3 Lecture Notes - Lecture 4: Utility, Demand Curve, Marginal Utility
12 May 2018
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Topic #3 – Demand and Utility
Explaining/Exploring Demand Curves
1) Why are demand curves negatively sloped?
2) How do we interpret a point on the demand
curve?
3) How do we interpret an area under the
demand curve?
4) How do demand curves relate to behaviour of
consumers and well-being of consumers?
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Beginning of the answers.
Demand curves reflect the “utility” (or well-being,
or satisfaction, or happiness) of consumers –
measured in dollars.
Demand curves can be used to measure the
willingness-to-pay for a good by consumers
Individuals who consume (or not) are making
decisions designed to maximize their own well-
being (utility), with the income they have
available.
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Imagine Fred has a utility function for
hamburgers per month where Q = # of
hamburgers.
We assume (a bit unusual, but convenient) that U
is measured in dollars (the value of well-being to
Fred)
Fred’s utility function ⇒ U = 20Q - Q2
U is total utility (obtained by consuming Q units)
If Q = 1, U = $19
If Q = 2, U = $36
If Q = 3, U = $51
If Q = 4, U = $64
If Q = 5, U = $75
If Q = 6, U = $84
If Q = 7, U = $91
And so on
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MGEA02H3 Full Course Notes
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Document Summary
Demand curves reflect the utility (or well-being, or satisfaction, or happiness) of consumers measured in dollars. Demand curves can be used to measure the willingness-to-pay for a good by consumers. Individuals who consume (or not) are making decisions designed to maximize their own well- being (utility), with the income they have available. Imagine fred has a utility function for hamburgers per month where q = # of hamburgers. We assume (a bit unusual, but convenient) that u is measured in dollars (the value of well-being to. Fred"s utility function u = 20q - q2. U is total utility (obtained by consuming q units) Perhaps you can see that du/dq = 20 - 2q du/dq is marginal utility (mu) Marginal utility is positive, but as q increases, this gets smaller (it diminishes: d2u/dq2 < 0 , this is called [the assumption of] diminishing marginal utility) If q = 1, u = , du/dq = .
