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Unformatted text preview: 1 Econ 1, Winter 2008 RATIKA NARAG, Ph.D. LECTURE 11 Agenda for the Next Month (Instruction ends 03/14) – Chap 10, Chap 7, Chap 8: 02/21 – Chap 9: 02/26-02/28 – Chap 14: 03/04-03/06 – Chap 16: 03/11 – Chap 15: 03/13 – Final Review: TBD – Final Exam: 03/21/08 (8:00-11:00 am) LECTURE 11 Administrative: –Office hours are after the lectures – No office hour on 02/28; will have extra office hours on 02/21 to make up –Bunche 2250B –Collect your midterms from the TAs LECTURE 11 Utility: The satisfaction, or reward, a product yields compared to its alternatives MU is the additional satisfaction gained by the consumption or use of one more unit of something LECTURE 11 Total vs Marginal Utility – Total Utility: the total amount of satisfaction that a consumer receives from consuming a certain amount of a good or service (e.g. Utility from 5 slices of Pizza) – MU: the additional satisfaction that a consumer receives from consuming an additional unit of a good or service (e.g. Utility from the 5 th slice of Pizza) LECTURE 11 A TU graph slopes upward, depicting the increased total satisfaction received from consuming additional units The TU curve becomes flatter, however, as MU decreases with each additional unit MU: the change in utility resulting from a change in consumption of a good or service The extra utility from an extra unit = ∆ TU/ ∆ Q 2 LECTURE 11 The Law of Diminishing Utility – Holding consumption of other goods constant, the utility any consumer derives from successive units of a particular good eventually decreases as total consumption increases – Implies that the MU curve is downward sloping LECTURE 11 Example: 57 7 57 6 56 5 52 4 46 3 35 2 20 1 ? Marginal Utility Total Utility Quantity LECTURE 11 Example: 57 7 1 57 6 4 56 5 7 52 4 11 46 3 15 35 2 20 20 1- Marginal Utility Total Utility Quantity LECTURE 11 Marginal Analysis: – Marginal analysis is the best way to think about “how much” decisions – Think in terms of how much marginal utility the individual gets from spending one extra dollar – The key decision for the consumer is: how to allocate an additional dollar between good X and Y LECTURE 11 P x = how much money you need for a unit of Good X P Y = the rate you get money by giving up Good Y P x / P Y =total Good Y you must give up to raise enough money to buy 1 unit of Good X Equilibrium: condition in which TU cannot increase by spending more of a given budget on one good and spending less on another good LECTURE 11 Remember: – Its not correct: MU of consumption of any 2 goods must be the same – MU per dollar must be the same (takes prices into account)...
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This note was uploaded on 04/16/2008 for the course ECON 1 taught by Professor Nagata during the Winter '08 term at UCLA.
- Winter '08