ECON 2001 Lecture Notes - Lecture 5: Marginal Utility, Economic Surplus, Porsche 550

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17 Oct 2014

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Consumer choice: prices are important in determining consumer behavior. New products have to be priced correctly. Determinants of demand: sociopsychiatric theories tells us why people desire certain goods and services, but do not tell us why they are actually purchased. To buy goods, one must be both willing and able to pay for them. Prices and income are just as relevant to consumption decisions as are basic desires and preferences. Demand - the willingness and ability to buy specific quantities of a good at alternative prices in a given time period, ceteris paribus: four factors determine an individual"s demand for a product: Tastes (a desire for this and other goods). Diminishing marginal utility: law of diminishing marginal utility - the marginal utility of a good declines as more of it is consumed over a given period. Its characteristics are the same as the individual"s demand curve, except that the.

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We have now ventured in the part of economic theory where we explore why we buy goods and services. We know we respond to prices but we also buy goods because we derive satisfaction from them. Consider the law of demand and of supply, elasticity and consider the determinants of demand, supply, and the determinants of elasticity. Then, watch the following video clip.

"A Place for My Stuff" by the late comedian George Carlin. # 1:http://www.youtube.com/watch?v=JLoge6QzcGY

The video is from the late George Carlin - there is some profanity and "adult humor" in it - so be careful if you are at work or home watching it - Comment on this. When is enough enough? It is true what the bumper sticker says that "whoever has the most stuff at the end wins"? Is he/she the happiest? Or, is happiness determined not by who has the most, but who needs the least? What is all this stuff doing to us? Are we better off? Worse off? Neither? Or both? Why are self storage facilities and "home organizers" some of the fastest growing industries in the USA?

turquoisesardine711

Determine whether prices increases or price decreaese more salient? (that is, which do we more readily remember)? Why?

The overall CPI is an average, that includes considerable variance. The price of lamb and mutton, for example, is down over 13 percent on the past year. But the price of beef is up 10 percent. The upshot is that most of the rising prices are rising at a rate that's faster than 2 percent. And when you think about inflation, you're probably thinking about the prices that are going up â not the prices that aren't. And you're not wrong to think that most of the goods that are becoming more expensive are becoming more expensive at a faster rate than that. It's just that those price increases are offset by price declines elsewhere.

Another issue is that when firms cut prices, they generally do so a bit on the sly. Sales will be 20 percent off rather than 15 percent off. Or the sale will last two weeks instead of one. Or the markdown will be extended to a larger number of items.

These discounting tactics are designed to maximize revenue from less-thrifty shoppers. But they're also meant to make you feel subjectively like you got a good deal through your own personal thrift and diligence. That same feeling, however, tends to blind you to the reality that if you are finding more great deals lately probably everyone else is too. Prices are falling and you just don't realize it.

Source: http://www.vox.com/2014/7/22/5926079/inflation-perceptions-frequency-bias

17. Which of the following is a determinant of supply?

A. Tastes and preferences

B. Price of a complementary good

C. Consumer income

D. Technology

18. A market is in equilibrium:

A. provided there is no surplus of the product

B. at all prices above that shown by the intersection of the supply and demand curves

C. if the amount producers want to sell is equal to the amount consumers want to buy

D. whenever the demand curve is downsloping and the supply curve is upsloping.

19. If the market price is above the equilibrium price:

A. A shortage will occur and producers will produce more and lower prices

B. A surplus will occur and producers will produce less and lower prices

C. A surplus will result and consumers will bid prices up

D. Producers will make extremely high profits

20. The market system automatically corrects a surplus condition in a competitive market by:

A. Raising the price of the commodity in question while increasing the quantity demanded

B. Raising the price of the commodity in question while decreasing the quantity demanded

C. Reducing the price of the commodity in question while increasing the quantity demanded

D. Reducing the price of the commodity in question while decreasing the quantity demanded

21. The price elasticity of demand measures:

A. buyer responsiveness to price changes.

B. the extent to which demand curve shifts as incomes change.

C. the slope of the demand curve.

D. how far business executives can stretch their fixed costs

22. The elasticity of demand for a product is likely to be greater:

A. if the product is a necessity, rather than a luxury good.

B. the greater the amount of time over which buyers adjust to a price change

C. the smaller the proportion of one's income spent on the product.

D. the smaller the number of substitute products available.

23. Market failure is said to occur whenever:

A. private markets do not allocate resources in the most economically desirable way

B. prices rise

C. some consumers who want a good do not obtain it because the price is higher than they are willing to pay

D. government intervenes in the functioning of private markets.

24. A negative externality or spillover cost occurs when:

A. firms fail to achieve allocative efficiency.

B. firms fail to achieve productive efficiency.

C. the price of the good exceeds the marginal cost of producing it.

D. the total cost of producing a good exceeds the costs borne by the producer

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ECON 2001 Lecture Notes - Lecture 5: Marginal Utility, Economic Surplus, Porsche 550

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