gs_-05_--_Three_fundamental_economic_laws

gs_-05_--_Three_fundamental_economic_laws - Notice: As of...

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1 Notice: As of Nov. 24, 2009 According to UVLE for ECONOMICS 11, there are 76 members who have registered. This is still relatively low as a percent of the enrollment in the whole class. Lecture #5: THREE FUNDAMENTAL LAWS ± LAW OF DIMINISHING MARGINAL UTILITY ± LAW OF DIMINISHING RETURNS ± LAW OF COMPARATIVE ADVANTAGE Nov. 25, 2009 Econ 11 -- Lecture #5 3 LAWS OF CONSUMPTION THE LAW OF DIMINISHING MARGINAL UTILITY To explain how the demand for goods is determined.
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2 Nov. 25, 2009 Econ 11 -- Lecture #5 4 LAWS OF PRODUCTION THE LAW OF DIMINISHING RETURNS To explain how the supply of goods is determined. Nov. 25, 2009 Econ 11 -- Lecture #5 5 LAWS OF SPECIALIZATION IN PRODUCTION THE LAW OF COMPARATIVE ADVANTAGE To explain how individuals, regions and countries choose the goods that they produce. CONSUMPTION AND SATISFACTION ± Consumption is the act of using goods for immediate satisfaction. ± UTILITY IS A SUBJECTIVE PHENOMENON – A PSYCHOLOGICAL EXPERIENCE ± We can measure UTILITY OR SATISFACTION.
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3 Nov. 25, 2009 Econ 11 -- Lecture #5 7 1 2 3 4 5 0 16 14 12 10 8 6 4 2 Quantity consumed Total Utility (TU) GRAPH OF TOTAL UTILITY TU 16 5 15 4 13 3 10 2 6 1 0 0 TU Q Nov. 25, 2009 Econ 11 -- Lecture #5 8 1 2 3 4 5 0 16 14 12 10 8 6 4 2 Quantity consumed MARGINAL UTILITY GRAPH OF MARGINAL UTILITY 1 5 2 4 3 3 4 2 6 1 0 MU Q MU MU is downward sloping. Nov. 25, 2009 Econ 11 -- Lecture #5 9 THE LAW OF DIMINISHING MARGINAL UTILITY ± A PSYCHOLOGICAL, SUBJECTIVE LAW oWhat the “law” says: The consumption of a good increases total satisfaction but each additional unit of the good consumed yields less and less satisfaction. oWhat it does not say: Total satisfaction diminishes with consumption. oA testable outcome of subjective experience.
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4 Nov. 25, 2009 Econ 11 -- Lecture #5 10 THE LAW OF DIMINISHING RETURNS ± A TECHNOLOGICAL LAW oTechnological progress depends on the growth of knowledge and inventions applied to production. oThe law of diminishing returns follows physical or mechanical behavior rather psychological reaction (as is the case with the law of diminishing marginal utility).
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gs_-05_--_Three_fundamental_economic_laws - Notice: As of...

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