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outline_ch04 - Chapter 4 Demand: The Benefit Side of the...

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Unformatted text preview: Chapter 4 Demand: The Benefit Side of the Market I. Needs, Wants and Demand Prices and Quantity Demanded In a market, the price serves to ration goods and services Those who get the good are those people who are willing and able to pay The demand curve is a relationship between the quantity demanded and Prices and Quantity Demanded The location of the demand curve is determined by all the other determinants of demand: incomes, prices of other goods, preferences, weather, expectations, non- monetary costs Price and Quantity Demanded It is assumed that, except for the price of the good, everything else that may affect demand is constant in particular: Quality is Consumers incomes are Prices of other goods are Consumer tastes are unchanged Law of Demand Once we have achieved a bare subsistence level of consumption, economists speak only The Law of Demand People do less of what they want to do as the cost of doing it rises i.e. typically demand curves Needs or Wants ? Sometimes its easy to say a good is needed E.g. warm clothing in a Canadian Sometimes its hard to distinguish needs from wants E.g. My old coat is so ugly, To analyze how markets actually work, the crucial issue is how much people are willing Downward Sloping Demand Curves We assume that consumers are rational and motivated by their self- interest and will decide to purchase more of a good or service only Why does the self-interested behaviour of consumers normally lead to ? II. Choices and the Law of Demand Utility Underlying Assumption: the more we consume, the more utility we have As we consume more and more of a particular commodity, there tends to be a decline in the additional satisfaction we Example: the first cookie may taste great, but if you eat a whole package, the last one consumed usually gives much Optimal Combination An Optimal Combination of Goods is an affordable combination that yields the highest An optimal combination of goods is also referred to as an Optimal Allocation of Optimal Consumption If consumption spending is NOT Optimally Allocated , it is possible to increase total utility by reallocating spending $1 less on one good and switching that $1 spending to a good with Greater Marginal Utility will increase Optimal Consumption If consumption spending IS Optimally Allocated , it will not be possible to increase total utility by transferring expenditure from The only way it will not be possible to spend $1 less on one good and spend that $1 on a good with greater marginal utility is if all goods have the same Optimal Combination of Goods...
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outline_ch04 - Chapter 4 Demand: The Benefit Side of the...

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