Econfin 4.pptx - JOHN HEAMAN Lecture 4 Consumer demand...

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JOHN HEAMAN Lecture 4 Consumer demand: utility and indifference
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News story in FT Sugar surges as blaze in Brazil destroys up to 300,000 tonnes” Sugar prices surged to the highest level in a year after a fire engulfed at least four warehouses at the Brazilian port of Santos, potentially wiping out more than 10 per cent of monthly sugar exports in a few hours. FT 19/20 October 2013 page 20.
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1 . Brand X sold 400,000 items at £100 each last year. It is known that its price elasticity of demand is -0.6 (calculated at the current price and quantity). What would sales be this year if there are no other changes affecting demand and the price per unit is raised to £110? a) 350,000 b) 376,000 c) 380,000 d) 360,000 e) 424,000
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2. Tube travel, which is a normal good, fell this year compared to last from 4 million journeys per day to 3.6 million journeys per day. At the same time the price per journey rose from £1 to £1.1 and there was no significant change in consumer incomes. Which one of the following is consistent with this information: a) Elasticity of demand is equal to -1. b) Elasticity of demand is equal to +1. c) Elasticity of demand is equal to -2. d) Elasticity of demand is equal to -0.1. e) The incomes of those travelling in London rose and the income elasticity of demand for tube travel is positive.
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Consumer choice Consumers maximize utility subject to a budget constraint. Firms maximize profit subject to a cost and demand constraint. Value (and therefore price) depend on marginal and not total utility. This has an analogue in behaviour of firms where marginal costs and marginal revenues are critical for determining output Price changes have an impact on consumers that can be thought of as being made up of an income effect and a substitution effect.
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UTILITY is the personal satisfaction derived from consuming a product or service The Utility Theory of Demand Each consumer is assumed to maximise his/her own satisfaction. There is a key distinction between the total utility that each consumer gets from the consumption of all units of some product and the marginal utility each consumer obtains from the consumption of one more unit of the product. Marginal utility is the addition to total utility derived from consuming one more unit. The basic assumption is that the utility the consumer derives from the consumption of successive units of a product diminishes as the consumption of that product increases. Each consumer reaches a utility-maximising equilibrium when the utility he or she derives from the last £1 spent on each product is equal. Another way of putting this is that the marginal utilities derived from the last unit of each product consumed will be proportional to their prices.
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Total and Marginal Utility Schedules Number of films attended per month Total utility 0 1 3 4 2 10 6 7 5 9 8 0.00 15.00 25.00 31.00 35.00 37.50 10.00 4.00 2.50 1.25 0.90 0.80 Marginal utility 39.00 40.25 41.30 42.20 43.00 15.00 6.00 1.05 1.5
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2 4 6 8 10 10 20 30 40 50 Total and Marginal Utility Curves [i]. Increasing total utility [ii]. Diminishing marginal utility Quantity of films [attendance per month] 15 10 5 U t i l i t y [ £ ] 20 0 U t i l i t y [ £ ] 2 4 6 8 10 0
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