Textbook Notes (363,689)
Canada (158,529)
Economics (586)
ECON 102 (243)
Eva Lau (7)

ch 08 utility and demand.docx

3 Pages
Unlock Document

ECON 102
Eva Lau

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
More Less

Related notes for ECON 102

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.