Lecture3 - Econ 208 Lecture 3 Utility and Demand page 1...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Econ 208 Lecture 3 Utility and Demand page 1 Lecture3: Utility as an explanation of Demand Budget Lines and Opportunity Cost The calculation is the number of dollars per loaf ($10) divided by the number of dollars per apple ($5). 5 $ / 10 $ / $ / $ / = = Apple Loaf Loaf Apples Or P b /P a . If you go through this exercise in your head, you will never get it wrong. To repeat: if we want to determine the opportunity cost of B in terms of A, divide the price of B by the price of A. If you want to find the opportunity cost of A in terms of B, divide the price of A by the price of B. Changes in Price and the Law of Demand Suppose the price of bread falls to $5, but apples stays the same. What does the budget line look like. Graph here. Max loafs now 20. P b/ P b = 1. Let’s look at this graph. Note that it rotates out from the end point on the Apple Axis. There is more consumption of both products possible except at the end point for A. In a very meaningful sense, this implies an increase in real income , because a household who consumes more than just A can increase consumption of one or both goods. Hold that thought.
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Econ 208 Lecture 3 Utility and Demand page 2 Let’s take a different case. Suppose that our household starts out with an Endowment of 10 apples and 5 loaves of bread. Note that it is on the budget line, since 10*5 + 5*10 = 100, the proposed money income. Suppose now that the household can actually exchange these goods in the market at the quoted prices. That means it can ‘move’ anywhere on the line between the two end points. We could say that in principle, it can choose which combination it would prefer. Now, suppose that the price of loaves falls to $5.00 as before. What does the new budget line look like. We start at point (10A, 5B). At the new price the household gets 1 loaf per apple rather than a half loaf. Starting at 10 apples, if it sells all its apples, it can add 10 loaves, or to 15 apples at a fixed rate. [draw line] What about the other way. Previously a household that gave up a loaf got 2 apples in exchange. Now it only gets 1 apple because the loaf is worth only half as much. [draw line]
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern