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ECO101H1 (575)
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Lecture 9

# Lecture 9-Beneath the Demand and Total Revenue

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Department
Economics
Course
ECO101H1
Professor
Jack Carr
Semester
Fall

Description
Thursday, October 15, 2009. Beneath the Demand and Supply Curve: Overview Principal of Diminishing Marginal Utility Total utility: total satisfaction to person from consumption of products Marginal utility: Additional satisfaction (change in total utility) from consumption of one more units of products Principal of Diminishing Marginal Utility: As a person consumes more of a good, the marginal utility of that good declines. Numeral Example Movie per Month Total Utility (TU) Marginal Utility (MU) 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 SS Q P DD 1. Perfect Competition 2. Profit Maximizing Behaviour 3. Short-run and Long-run Equilibrium a) Preference b) Rational Choice www.notesolution.com Observations: 1) TU increases with additional consumption 2) MU decreases with additional consumption Consumers seek to Maximize Total Utility (satisfaction), Given Their Budget Constraints Optimizing Rule MUx = MUy Px Py For all consumed goods, x and y. Observations: 1) Marginal Utility is key to optimal choice 2) Equivalent statement of rule: Marginal utility per dollar spent is the same for all consumed goods MUx / Px measures the Marginal utility of a dollar spent on good x. Total Utility Quantity of Movies Utility Marginal Utility Quantity of Movies Utility www.notesolution.com Numerical example: Optimal Consumption Decisions: &RQVXPHU¶VBudget: \$14 (per week) Price: Apples \$2 Beets \$4 Apples Beets Q TU MU Q TU MU 0 0 - 0 0 - 1 80 80 1 100 100 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 #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) 3. MUA = MUB? YES NO PA PB 4. Total Utility 360 310 5. To Maximize NO CHANGE Consume more beets (so MUB ; Utility, given Budget Constraint Consume less apples (so MUA 9 Implication #1: Demand Curves Slope Downward 1. Initial Equilibrium: MUx = MUy « Px Py 2. Px increases to P1x: MUx < MUy « Px Py if consumption of good x is unchanged www.notesolution.com 3. Consumer re-optimizes, by decreasing consumption of x, and thus increasing the marginal utility of x, until MU1x = MUy « P1x Py where MU1x > MUx (q1x < qx) Optimizing Rule: Numerical Illustration Pepsi P = \$1 MU = 10 MU = 10 = 10 P 1 Candy P = \$3 MU = 30 MU = 30 = 10 P 3 Note: MU is MU of last unit consumed Pepsi 1. P rises from \$1 to \$2 2. Reduce consumption until marginal utility of last unit consumed rises from 10 to 20 3. MU / P = 20 / 2 = 10 (same for other goods) 4. P 9 Æ QD ; Demand Curve Slopes Downward Excise Tax: Summary 1. Province of Ontario imposes 8% sales tax: A) to be paid by sellers OR B) to be paid by buyers 2. Who will beaUWKHEXUGHQRIWKHWD[³WD[LQFLGHQFH´" Answer: (1) same under A or B (2) depends upon DD/SS elasticities www.notesolution.comThursday, October 15, 2009. Beneath the Demand and Supply Curve: Overview SS P 1. Perfect Competition 2. Profit Maximizing Behaviour 3. Short-run and Long-run Equilibrium a) Preference DD b) Rational Choice Q Principal of Diminishing Marginal Utility Total utility: total satisfaction to person from consumption of products Marginal utility: Additional satisfaction (change in total utility) from consumption of one more units of products Principal of Diminishing Marginal Utility: As a person consumes more of a good, the marginal utility of that good declines. Numeral Example Movie per Month Total Utility (TU) Marginal Utility (MU) 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 www.notesolution.com
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