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Lecture 6

Economics 1021A/B Lecture Notes - Lecture 6: Utility, Marginal Cost, Normal Good


Department
Economics
Course Code
ECON 1021A/B
Professor
Michael Parkin
Lecture
6

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Chapter 8 Utility and Demand
Why is PPF a straight line?
Opportunity cost is constant
Consumption possibilities and choices
Any given day consumers have a choice of what ot buy
Those choices are effect by 2 main things
oConsumption possibilities
What’s available to consume
Include all things that we can actually afford to buy
What determines what we can afford to buy
Income
Price
Consumers budget line
Consumers possibilities are limited by the income
All possibilities, when all income is spent
oPreferences
Everyone faces different choices because of consumption preferences
Benefit or satisfaction from consuming a good or service is called utility
Utility
oTotal utility
Total benefit a person gets from consumption of goods
Generally, more consumption gives more total utility
oMarginal utility
Change in total utility that results from a unit increase in the quantity of
the good consumed
NOTE: AS QUANTITY CONSUMED OF A GOOD INCREASES, THE
MARGINAL UTILITY FROM IT DECREASES
THIS IS CALLED THE PRINCIPLE OF DIMINISHIND MARGINAL
UTILITY
oUtility-maximizing choice
Key assumption: household chooses the consumption possibility that
maximizes total utility
Consumers will choose the allocation that will maximize their utility
Consumer equilibrium
Allocation that allows one to maximize utility while exhausting all
possible income
Economists use marginal analysis
Lets compare marginal benefit of doing something vs marginal
cost
In this case, compare marginal benefit of one thing to marginal
benefit of another
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