Chapter Outline - Ch.5 - Demand Curve and the Behavior of Consumers

Chapter Outline - Ch.5 - Demand Curve and the Behavior of Consumers

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Microeconomics – Chapter 5 Outline – 9/26/07 Consumer Surplus – What we would call a “good deal” In this Chapter, we examine why the demand curve is the way it is. The main assumption of the model is that people make purposeful choices with limited resources to increase their satisfaction and better their lives. o Utility – Represents people’s preferences for different items (products, jobs, leisure time) among a set of alternatives. Numerical indicator of a person’s preference for some goods compared to others. In general, if activity A is preferred to alternative B, then the utility from A is greater than the utility from B (higher levels of utility indicate a greater preference) Marginal Utility – Marginal utility is the increase in utility from consuming an additional unit of a good Indifferent – When the utility of two options is the same (no preference for choice A or choice B) An important feature of economists’ use of utility is that it does not require or imply that the utilities of different people can be compared. o Define utility and then use it to derive the slope and position of the demand curve REVIEW For each combination of goods, there is a numerical value of utility Combinations of goods with a higher utility are preferred to combinations of goods with a lower utility The units by which utility is measured do not affect the preference for one combination compared with another. The Budget Constraint and Utility Maximization - Budget Constraint o Budget Constraint – An income limitation on a person’s expenditure on goods and services. A budget constraint tells us that total expenditures on all goods and services must be less than a certain amount, perhaps the person’s income for the year. The budget constraint is what limits the consumer’s choices. In general, a higher price for a good reduces consumption opportunities for the individual.
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- Maximizing Utility Subject to the Budget Constraint * Utility maximization – means that people choose the highest possible level of utility given their budget constraint. The combination that will yield the maximum utility and be within the budget. Effect of a Change in Price: A movement Along a Demand Curve - As price increases, the quantity demanded decreases - As price decreases, the quantity demanded increases Effect of a Change in Income: A Shift in the Demand Curve - Consider the effect of a change in income on the quantity of a good that the individual will purchase. -
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This note was uploaded on 04/15/2008 for the course ECON 100 taught by Professor Stephaniemartin during the Fall '07 term at Allegheny.

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Chapter Outline - Ch.5 - Demand Curve and the Behavior of Consumers

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