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York University
ECON 1000

CHAPTER 8 UTILITY AND DEMAND income and prices limit your consumption choicesyou can only buy things that you can afford things that fall under your budget you will always buy the goods and services that maximize your UTILITY from the many choices you have to choose fromutility helps us understand why people buy more of a goodservice when its price falls and why people buy more of most goods when their income increasesUTILITY the benefitsatisfaction that a person gets from the consumption of goods and servicesTOTAL UTILITYthe total benefit a person gets from the consumption of all the different goods and servicesmore consumption gives more total utility increase in quantity of goodincrease in units of utility we can use any scale that we wish to measure the utilityMARGINAL UTILITYthe change in total utility that results from a one unit increase in the quantity of a good consumedPRINCIPLE OF DIMINISHING MARGINAL UTILITYAs the quantity consumed of a good increases the marginal utility from consuming it decreasesALL THINGS THAT PEOPLE ENJOY AND WANT MORE OF HAVE A POSTIVE MARGINAL UTILITYexample polluted air has negative marginal utility because the more quantity you have of polluted air the lower your total utility and as the quantity of polluted air increases your marginal utility becomes negative because total utility keeps decreasingEXAMPLE OF UTILITY Total utility from a good increases as the quantity of the good increases For example as Lisa sees more movies in a month her total utility from movies increasesMarginal utility from a good decreases as the quantity of the good increases For example as the number of movies seen in a month increases marginal utility from movies decreasesAs consumption of pop cases increases total utility increasesAs quantity of pop cases increases marginal utility decreases UTILITY MAXIMIZING CHOICE how to spend money in order to get highest total utility within specified budget and preferences 1 A Spreadsheet Solution The direct way to find the utilitymaximizing choice is to make a table in a spreadsheet and do the calculations Find the justaffordable combinations within consumer budget Find the total utility for each justaffordable combinationThe utilitymaximizing combination is the consumers choiceCONSUMER EQUILIBRIUMa situation in which a consumer has allocated all of hisher available incomebudget in the way that maximizes hisher total utility given the prices of the goods and services EXAMPLE Lisa has 40 to spend As the above chart specifies 2 movies and 6 cases of pop is the combination that will result in the maximum total utility for Lisa 1624 40 The total utility from this combination is 315 Row C is the consumer equilibrium for Lisa
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