Topic 6 - Consumer Demand Theory 1. Preference: -- Utility Theory -- Indifference Curve (not required) 2. Principle of Diminishing Marginal Utility 3. Consumers seek to maximize utility, subject to budget control -- Optimizing Rule; -- Exa

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16 Oct 2011
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ECO100Y1-Pesando-Notes edited by Eva Wu
Topic 6 Consumer Demand Theory
(Week six Oct 13th Oct 18th)
Outline:
1. Preference:
-- Utility Theory
-- Indifference Curve (not required)
2. Principle of Diminishing Marginal Utility
3. Consumers seek to maximize utility, subject to budget control
-- Optimizing Rule;
-- Example
-- Implication: Why Demand Curve Slopes downward;
4. Consumer Surplus
-- Example;
-- Willingness to pay & Steplike demand curve;
-- Linear demand curves;
5. Producer Surplus
6. Allocative Efficiency
7. What Consumers and Producers would pay to keep a market open;
Principle of Diminishing Marginal Utility
Total Utility: total satisfaction a person receives from consumption of goods;
Marginal Utility: additional satisfaction (change in total utility) from consumption of one more unit of the
product;
As a person consumes more of a good, the marginal utility of the good declines.
Numerical Example:
Movies
Per
Month
Total
Utility
Marginal
Utility
0
0
--
1
30
30
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
Quantity
Utility
ee
Total Utility
Quantity
Utility
ee
Observation:
a) TU increases with additional consumption,
but at a decreasing rate;
b) MU decreases with additional consumption;
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