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Chapter 8

Chapter 8 - Utility and Demand.docx

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ECON 1000
Ardeshir Noordeh

ECON 1000 October 24, 2013 CHAPTER 8: UTILITY AND DEMAND Consumption Choices • The choices you make as a buyer of goods and services is influenced by many factors, which economists summarize as: o Consumption possibilities: all the things that you can afford to buy o Preferences • A Consumer’s Budget Line o For example, consumption possibilities are limited by income, the price of a movie, and the price of pop. o When Lisa spends all of her income, she reaches the limits of her consumption possibilities. o Lisa’s budget line shows the limits of her consumption possibilities. • The choice that Lisa makes depends on her preferences—her likes and dislikes. • Her benefit or satisfaction from consuming a good or service is called utility. o Total utility is the total benefit a person gets from the consumption of goods. Generally, more consumption gives more total utility. • Marginal utility from a good is the change in total utility that results from a unit-increase in the quantity of the good consumed. ECON 1000 October 24, 2013 o aka marginal benefit o As the quantity consumed of a good increases, the marginal utility from it decreases. o We call this decrease in marginal utility as the quantity of the good consumed increases the principle of diminishing marginal utility. • The key assumption is that the house
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