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Chapter 4

ECO100Y1, CH4,notes.docx

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Robert Gazzale

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ELLINA ABDUZHABAROVA ECO100Y1 Chapter 4 Demand: The Benefit Side of the Market The Law of Demand Other things remaining equal, people will purchase a smaller quantity of any good or service they want as the price of purchasing one more unit of it increases. The Concept of Utility- represents the satisfaction or pleasure that people drive from their consumption activities. Utility (Полезность) Maximization- people try to allocate their incomes so as to maximize their satisfaction. Utility measured in a util or one unit of pleasure. For most goods, utility rises at a diminishing (убывание) rate with additional consumption Marginal utility- denotes the amount by which total utility changes when consumption changes by one unit. Law of Diminishing Marginal Utility As consumption of good increases beyond some point, the additional utility gained from and additional unit of the good tends to decline. Example: If I have one red Chevrolet I’m happier than with none, however, with 2 Chevrolets I will be happier, but not twice happier. Budget constraint-spending limits Optional combination- is the affordable combination that delivers maximum total utility. The Rational Spending Rule To maximize utility yielded(bring) by a fixed income, spending must be allocated across goods so that the marginal utility per dollar is the same for each good. Marginal utility per dollar spent on cones MUc-marginal utility(utils/cons) MUs-marginal utility( utils/sundae) Pc-price of comes Ps-price of sundae In order to maximize utility, the ratio of marginal utility to price must be the same for each good the consumers buys. Demand depends on income and prices of other goods. Demand for a commodity (товар) is determined by the ability and their willingness of potential consumers to pay. Demand for specific goods in economy may change, not just because of changes in average income but also because of changes in the way income is distributed among the people. Income effect is the change in quantity demanded of a good that occurs because a change in the price of the good changes the real income of the purchaser. Substitute effect- when real income is held constant, the change in quantity demanded of a good whose relative price has changed ELLINA ABDUZHABAROVA Real price- is value in terms of some other good or service. Nominal price is the price of a good is its value in terms of money Horizontal addition- the process of adding individual demand curves to get the market demand curve. We add quantities that are measure on horizontal axes of individual demand curves. The relationship between the demand and the price can be expressed as the graph, table
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