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Topic 6 - consumer demand theory.pdf

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University of Toronto St. George

Topic 6 – Consumer Demand Theory (Week six Oct 13 – Oct 18 )h th Outline: 1. Preference: -- Utility Theory -- Indifference Curve (not required) 2. Principle of Diminishing Marginal Utility 3. Consumers seek to maximize utility, subject to budget control -- Optimizing Rule; -- Example -- Implication: Why Demand Curve Slopes downward; 4. Consumer Surplus -- Example; -- “Willingness to pay” & Steplike demand curve; -- Linear demand curves; 5. Producer Surplus 6. Allocative Efficiency 7. What Consumers and Producers would pay to keep a market open;  Principle of Diminishing Marginal Utility Total Utility: total satisfaction a person receives from consumption of goods; Marginal Utility: additional satisfaction (change in total utility) from consumption of one more unit of the product; As a person consumes more of a good, the marginal utility of the good declines. Numerical Example: Movies Total Marginal Utility Utility Per Utility Utility ee ee Month Total Utility Marginal Utility 0 0 -- 1 30 30 2 50 20 3 65 15 Quantity Quantity 4 75 10 5 83 8 Observation: 6 89 6 a) TU increases with additional consumption, 7 93 4 but at a decreasing rate; 8 96 3 b) MU decreases with additional consumption; 9 98 2 10 99 1 ECO100Y1-Pesando-Notes edited by Eva Wu  Maximizing Utility Assume consumers are rational, consumers seek to maximize total utility (satisfaction), given their budget constraints. 1. Optimizing Rule MU /P =MU /P for all consumed goods, x and y. X X Y Y 2. Example: Optimal Consumption Apple Beets Budget: $14/week Quantity TU MU TU MU Goods: apple $2/ea; 0 0 -- 0 -- Beet: $4/ea 1 80 80 100 100 Question: What is the combination of apples and 2 140 60 180 80
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