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# ch 08 utility and demand.docx

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School
Department
Economics
Course
ECON 102
Professor
Eva Lau
Semester
Fall

Description
08 – utilityanddemand Chapter 8: Utility and Demand Maximizing Utility  a consumer will buy the goods and services that will maximize their utility  utility: the benefit or satisfaction that a person gets from the consumption of goods and services Total Utility  total utility: the benefit that a person gets from the consumption of all the different goods and services  depends on the level of consumption (more consumption –> more satisfied)  the increase in total utility starts to decline as quantity increases Marginal Utility  marginal utility: the change in total utility that results from a one-unit increase in the quantity of a good consumed  total utility almost always increases as quantity increases, but the amount that it increases by slowly falls  positive marginal utility are things that people enjoy and want more of  some objects/activities have negative marginal utility: hard labour and polluted air for example  diminishing marginal utility: the tendency for marginal utility to decrease as the consumption of a good increases The Utility-Maximizing Choice  when the marginal utility is positive, the higher the quantity, the more utilities one gets  consumer equilibrium: a situation in which a consumer has allocated all of their available resources in the way that maximizes their total utility  a simple way of finding consumer equilibrium uses the idea that choices are made at the margin Choosing at the Margin  spend all the available income  more consumption brings more utility, so only those choices that exhaust income can max. Utility  equalize the marginal utility per dollar for all goods  marginal utility per dollar: the marginal utility from a good obtained by spending one more dollar on that good  marginalutilityperdollarMU P  the basic idea is to move dollars from good A to good B if it increases total utility  if buying more of good A decreases its marginal utility and buy less of good B increases its marginal utility, move dollars from good A to good B to increase TU  the gap between the marginal utilities per dollar gets smaller The Power of Marginal Analysis  find the utility-maximizing choice by comparing the marginal gain of having more of one good with the marginal loss of having less of another good  rule: if the marginal utility per dollar of one good exceeds the marginal utility per dollar from another good, buy more of the first good and less of the second good  the units in which utility is measured do not matter MU X MU Y  maximize utility when: P  P ; where x and y are 2 goods X Y Predictions of Marginal UtilityTheory page 1 of 3 08 – utilityanddemand  the marginal utility theory predicts the law of demand A Fallin the Price of a Pizza  to find the effect of a fall in the price of a movie on the quantities of movies and pop one buys in 3 steps:  determine the just-affordable combinations of movies and pop at the new prices  calculate the new marginal utilities per dollar from the good whose price has changed  determine the quantities of moves and pop that make their M
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