L11 Econ 1011 Lecture 4: Demand

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Wants stem from biological, cultural, or social origins: peer in uence is often the most important determinant of demand. Utility represents the satisfaction people derive from their consumption activities. Utility maximization is when people try to allocate their incomes so as to maximize their satisfaction. The additional utility from additional units of consumption declines as total consumption increases. Marginal utility: the additional utility gained from consuming an additional unit of a good. Optimal combination of goods: the affordable combination that yields the highest total utility: when one"s marginal utility per dollar is the same for two goods, cannot increase total utility. Spending should be allocated across goods so that the marginal utility per dollar is the same for each good. Mu1/p1 = mu2/p2: mu1 is marginal utility from good 1, p1 is price of good 1. Substitution effect: when the price of a good goes up, substitutes for that good become relatively more attractive.

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