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Lecture

# ECO100 - OCT 15

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Department
Economics
Course
ECO101H1
Professor
James Pesando
Semester
Fall

Description
MONDAY: 210 -- 400 IN209 THURSDAY 12:10 - 200 GE313 THURSDAY OCT 18 FROM 6:10 - 8:10 IN SS2106 Test 1: not required to find optimal consumption bundle, given prices, utility and budget ○ Without calculus, this can only be done by “trial and error” ○ Will be expected to understand the principle of optimization (ASSIGN 4) Consumer Demand Theory Con’t 3. Consumers seek to maximize utility (satisfaction), subject to budget constraint ● Principle of Diminishing Marginal Utility: As a person consumes more of a good, the marginal utility of the good declines. This principle, plus rational behavior: EXPLAINS: ○ 1) The rule of maximizing total utility (satisfaction), given the consumer’s budget constraint ○ 2) Why demand curves slope downwards ● Rational Behaviour: ○ Maximize total utility, given budge (income) constraint ● Result: Allocate income so that the marginal utility of the LAST unit of each goos consume, divided by its price, is the same for all CONSUMED goods. ● Observation: ○ 1) Straightforward to show using calculus (2nd year) ○ 2) Motivate with example (1st year) 3.1 Optimizing Rule 3.2 Example ● Numerical example: Optimal Consumption ○ Decisions ○ Consumer's Budget: \$14 (per week), Price: Apples \$ 2, Beets \$ 4 ■ We have to know how much you enjoy, how much utility you derive from consumption ■ Both example accords to the priciple of diminishing utility ○ Departing from the optimization rule, you can do better Apples Beets Q TU MU Q TU MU 0 0 - 0 0 - 1 80 80(additional 1 100 100 utility consuming that first apple) 2 140 60 2 180 80 3 180 40 3 240 60 4 200 20 4 280 40 5 210 10 5 300 20 ○ Alternative Consumption Choices ○ If you know what your weekly budget is, what your preferences are, you would never allocate your income so that the total utility would be 310 instead of 360 [want highest possible of satisfaction] #1 #2 3 Apples, 2 Beets 5 Apples, 1 Beet 1. Expenditure \$ 14 \$14 2. MUA / PA 20 (40 / 2)5 (10 / 2) MUB / PB 20 (80 / 4)25 (100 / 4) ( 25 is much higher than 5) 3. MUA /PA = MUB /PB? YES NO (optimizin g rule is satisfied Case 1) 4.Total Utility 360 310 5. To maximize No Consume
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