1d10d65679e9dc7b9ee551e87689881d_chap 5 f13.pptx

8/9/2019 1d10d65679e9dc7b9ee551e87689881d_Chap 5 f13.pptx

1/12

Demand : The Benefit Side


2/12

ObjectivesAt the completion of this section, the student should

1. understand the role of utility indetermining the shape of the demandcurve.

2. understand the source and role ofeconomic surplus in demand and supply.


3/12

La of Demand

!eople do less of hat they ant to do asthe cost of doing it rises

"hy# $elated %ssues: &eeds vs ants

&eeds ' cannot do ithout

"ants ' do not ant to do ithout

()$* +)" &))DSmostly ants

-tility ' ell eing /onsumers ma0imie ell eing


4/12

-tility ' Satisfaction

Artificial construct to help understandconsumer ehavior

/annot measure

/an compare to activities and say hichis etter

arginal -tility ' addition to satisfactiondue to consuming an additional unit of agood


5/12

La of Diminishing arginal -tility

1. "e add most desirale activities first

2. Successive units add less to satisfaction

3. Add units until the marginal utility e4ualsthe opportunity cost

5. 6iven 3, applied for all goods, e4ualiemarginal utility per dollar across good

1. Ad7ust until last dollar is orth the samesatisfaction regardless of ho it is spent


6/12

)0ample of -tility

)0: 82 for ice cream cone adds 19 -tils

85 for hamurger adds 1 -tils

)ach 8 spent on ice cream adds ;; -

)ach 8 spent on hamurgers adds ;;; -

Spending one less 8 on hamurgers costs;;; -, ut using that 8 on ice cream adds;;; -, increasing total satisfaction y ;;- ith no change in 8 spent

5

4

45 1


7/12

-tility )0ample

"hat do you uyfirst# "hy#

"hat ne0t#

"hat is the role ofarginal -tility#

"hat is role of cost#

)0., "hy do you eatmore at an all


8/12

=o /hoices are ade

>% have 819, hat shall % uy#? "hat do % li@e#

$an@ preferred +)AS%BL) options y satisfaction.

=o e0pensive are they# $an@ preferred feasile options y satisfaction per

dollar.

a@e purchases until money runs out )4ualie per dollar satisfaction contriution across

good

Marginal Utility per dollare4ualied acrossgood


9/12

/onsumer Surplus, 6raphically

!

Benefit of +irst unit

Benefit of second unit

/ost

!1

Benefit is the arginal utillity associated ith that unit.

Diminishing arginal -tility successiveC units less valuale.

Leads to donard sloping demand curve

!rice times 4uantity illing to uy is cost paid.

Consumer surplus is benefit not paid for.

1

"orth uying

&ot orth uying

D

Demand is the >ma0imum price, given .? the reservation price for that unit.

/onsumerSurplus


10/12

%ncome E Sustitution )ffects

Higher price lowers ability to buy (income) Spend less

Spend less on some goods and more on others

income elasticity effectC ith higher price of one good

Spend less on it more e0pensive, so must get moresatisfaction per unitC

Spend more on other goods relatively lesse0pensive, so donFt need as much satisfaction per 8

Overall! higher price "# lower satisfaction


11/12

!riceG

$ominal price current dollar measure %eal price dollar measure relative to prices of

other goods, re4uires ad7ustment across time asinflation general price level increasesC occurs

)0ample: 6asoline prices

&ominal price

1H9 8.39 per gallon

1HI9 8.3J per gallon

1HG9 81.29 per gallon

2999 81.39 per gallon

299G 83.J9 per gallon

299H 82.2G per gallon

2913 83.2J per gallon

Type cars ought

Large /ars

uscle /ars

S-(FsK(ansSmall /ars

1.92

9.H3

1.J5

.II

$eal !rice

/!%G2'199C

2H.3

3I.G

II.G

1G.G

21H.1 1.9 Small /ars

21J.G 1.9J #####

233.G 1.3H Small /ars


12/12

-sing -tility TheoryH

ar@et Demand =oriontal uantityC sum of %ndividual

demands

At each price, ho much ill ALL consumers uy# /onsumer Surplus

! ' arginal -tility -C of good ' enefit Successive units have diminishing - Sum of successive unit -Fs ' total enefit Sutract hat they pay to get /onsumer

Surplus

1d10d65679e9dc7b9ee551e87689881d_chap 5 f13.pptx

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