Demand - Week 3.docx - Economics – Week 3 Chapter 3 Demand in a Perfectly Competitive Market Overview Supply Objective Maximise Profit(TR-TC

Demand - Week 3.docx - Economics – Week 3 Chapter 3...

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Economics – Week 3 Chapter 3: Demand in a Perfectly Competitive Market Overview: Supply: - Objective: Maximise Profit (TR-TC) - Constraints: Prices and costs of production were given Demand: - Objective: Want to maximise happiness —> (measured in utility) o Utility represents the satisfaction that an individual derives from consuming a given good or taking a certain action. It is measured in utility per unit of time. o Utility is made up number - Constraints: Prices (stop us from buying everything), Income is limited. Decreasing marginal utility is the assumption that the utility from consuming an extra unit of a given good decreases with the number of units that have previously consumed. Agent 4: Max - Two consumption options: o Korean tacos and salad. - Objective: Maximise utility - Resources: Income - Constraints: o Prices: $4/taco, $2 salad Korean Tacos Salad Units Total Utility Marginal Utility (MB) Marginal Cost Units Total Utility Marginal Utility 0 0 - - 0 0 1 3 3 2 1 1 1 2 4.6 1.6 2 2 2 1 3 5.8 1.2 2 3 3 1 4 6.7 0.9 2 4 4 1 5 7.4 0.7 2 5 5 1 - Marginal Utility = (extra benefit) Demand Curve for an Individual: - The marginal benefit of buying a taco is MU Taco - The marginal cost of buying a taco is foregone utility of buying and consuming salads o MC Taco = (P Taco / P Salad ) x MU Salad - The cost-benefit principle says to buy another taco if: o MB Taco > MC Taco, OR if o MU Taco > (P Taco / P Salad ) x MU Salad
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Definitions: The consumer reservation price is the maximum price the consumer is willing to pay for a certain good or service.
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