ECO 06 - 27 OCT - Lecture 06 ECO 100Y5Y 27 October 2008 A....

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Lecture 06 27 October 2008 ECO 100Y5Y A. Cohen 1 E C O N O M I C S PARKIN BADE Lecture 6 27 October 2008 E C O N O M I C S PARKIN BADE Chapter 7 Utility and Demand Preferences and Utility Utility key concept for understanding why individual demand curves slope down to right Utility Individual Demand Market Demand Total Utility ( TU ) total benefit or satisfaction from all units consumed consumption TU continued
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Lecture 06 27 October 2008 ECO 100Y5Y A. Cohen 2 75 150 225 0 1 2 3 4 5 Q Utility TU Figure 7.3a Total Utility Marginal Utility ( MU ) additional satisfaction from additional unit consumed diminishing marginal utility — MU positive, but as consumption MU = slope TU (= Δ TU ) 0 1 2 3 4 5 Utility 75 Q MU Figure 7.3b Marginal Utility
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Lecture 06 27 October 2008 ECO 100Y5Y A. Cohen 3 0 1 2 3 4 5 Utility 75 …and diminishing marginal utility 75 150 225 0 1 2 3 4 5 Q Increasing total utility. .. Q TU MU Figure 7.3 Total Utility and Marginal Utility Individual and Market Demand (Ch. 5) Individual and market demand individual demand market demand market demand curve — horizontal sum of individual demand curves Figure 5.1 Individual and Market Demand Curves 0 P 1 30 Q 0 P 1 Q Lisa’s demand Market demand (a) 0 P 1 10 40 Q Nick’s demand (b) (c)
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Lecture 06 27 October 2008 ECO 100Y5Y A. Cohen 4 Efficiency, Price, and Value Value of good — maximum willing to pay for it related to total utility and consumer surplus Price of good – what consumers actually pay related to marginal utility Distinction between total and marginal utility resolves water – diamond paradox Consumer surplus from water Q P D S P w Q w Figure 7.7a Paradox of Value -- Water Water -- high TU and consumer surplus; low MU Q S D Consumer surplus from diamonds Q D P D Figure 7.7b Paradox of Value -- Diamonds Diamonds -- low TU and consumer surplus; high MU
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Lecture 06 27 October 2008 ECO 100Y5Y A. Cohen 5 Consumers strive for utility maximization
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ECO 06 - 27 OCT - Lecture 06 ECO 100Y5Y 27 October 2008 A....

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