Lecture11

Lecture11 - LECTURE 11 Agenda for the Next...

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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

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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 ? 0 0 Marginal Utility Total Utility Quantity LECTURE 11 Example: 0 57 7 1 57 6 4 56 5 7 52 4 11 46 3 15 35 2 20 20 1 - 0 0 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
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