Textbook Notes (363,569)
Canada (158,433)
Economics (359)
ECON 101 (172)
Chapter 6

Economics 101: Chapter 6

4 Pages
Unlock Document

University of British Columbia
ECON 101
Robert Gateman

Chapter 6 6.1 Marginal Utility and Consumer Choice  Economists assume that consumers are motivated to maximize utility  Total utility: the full satisfaction resulting from the consumption of that by a consumer  Marginal utility: the additional satisfaction from consuming one more unit of a product Diminishing Marginal Utility:  Law of diminishing marginal utility: utility from a consumed good that diminishes over time as the total consumption of the product increases o As more products are consumed, marginal utility decreases and total utility increases  Consumers attempt to maximize total utility, particularly income and market prices of products The Consumer's Decision:  To maximize utility with two products, the marginal utility of the last x consumed must equal the marginal utility of the last y consumed  A utility maximizing consumer allocates expenditure so that the utility obtained from the last dollar spent on each product is equal  Utility is maximized when marginal utility per dollar of good x = y  An Alternative Interpretation:  o Left side: relative ability of the two goods to add utility o Right side: relative price of the two goods o If the two sides do not equal, total utility can be increased  The theory is not a set of guidelines for maximizing utility, but it is meant to document the behaviour of maximizing The Consumer's Demand Curve:  A rise in the prise of product, with all other determinants held constant, leads the consumer to reduce the Qd of the product 6.2 Income and Substitution Effects of Price Changes  Real income: income expressed in terms of purchasing power Substitution Effect:  If prices change, purchasing power may stay the same if income also changes  Substitution effect: the change in Qd off a good whose relative price has changed, with purchasing power held constant o Increases Qd of a good whose price has fallen o Decreases Qd of a good whose price has risen Income Effect:  The change in Qd of a good from a change in real income (holding relative prices constant) o Leads consumers to buy more of a product when the price falls (normal good) Slope of the Demand Curve:  Combined Income/Substitution Effect: demand curve for any normal commodity is negative o A fall in price will lead to an increase in Qd  Giffen Goods: an inferior good for which the income effect outweighs the substitution effect o Has a positively sloping demand curve  Conspicuous consumption: goods purchased due to the price, rather than intrinsic value o The snob appeal, paying high price for goods such as diamonds, luxury cars etc. o Fall in price may lead to decrease in Qd (prices are relative to individuals) Application to Taxation:  A change to in the income tax rate will change the after-tax wage o Also changes the after-tax interest rate that savers receive 6.3 Consumer Surplus The Concept:  Consumer surplus: difference between the total value a consumer places on a product, and the payment a consumer actually makes to purchase a product o Difference between the maximum a consumer is willing to pay and the market price  Market demand curve shows the valuation a consumer places on each unit of a product o Area under the demand curve and above the price point/level shows consumer su
More Less

Related notes for ECON 101

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.