Lecture3

Lecture3 - Demand: The Benefit Side of The Market LECT U RE...

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Demand: The Benefit Side of The Market LECTURE
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Slide 2 The Law of Demand Suppose Starbucks offers free coffee for a full day. How many people will queue to get a free coffee?
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Slide 3 The Law of Demand The cost of an activity, good, or service involves both monetary costs and non- monetary costs. Waiting in the line is  a non-monetary cost
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Slide 4 The Law of Demand People do less of what they want to do as the cost of doing it rises. Recall The Cost-Benefit Principle The benefit of an activity equals the highest price we would be willing to pay to pursue it (= the reservation price ). As the cost of an activity rises and exceeds the reservation price, less of the activity will be pursued.
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Slide 5 The Origins of Demand Our reservation price depends on: “tastes” or “preferences” income What determines “tastes”/ “preferences”? Biology, health Culture, religion, family and upbringing Peer influence, advertising…
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Slide 6 Translating Wants into Demand Challenge: How to use our limited resources to fulfill our desires to the greatest possible degree? How should we allocate our income among the various goods and services that are available?
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Slide 7 Rules for Allocating Resources The general rule for allocating a resource efficiently across different production activities is: Allocate each unit of the resource to the production activity where its marginal benefit is highest.
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Slide 8 Measuring Wants: The Concept of Utility The satisfaction people derive from their consumption activities is called utility . Rationality assumption People allocate their income to maximize their satisfaction or total utility. => Utility maximization
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Slide 9 Pizza slices consumed per meal Utils 0 1 0 10 Units consumed per meal Units consumed per meal 20 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7 The Rational Utility Maximizer How many slices of pizza should consumer X consume if pizza slices are “free”?
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Slide 10 Pizza slices consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 0 10 Units consumed per meal Units consumed per meal 30 20 10 Total Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7 10 The Rational Utility Maximizer The marginal utility from consuming a good is the additional utility that results from consuming an additional unit of the good.
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Slide 11 Pizza slices consumed per meal Total Utility, Utils Marginal Utility, Utils Units consumed per meal Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7 0 10 18 10 8 0 1 2 The Rational Utility Maximizer Utility increases with consumption… but the additional utility from extra consumption declines.
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Slide 12 Pizza slices consumed per meal Total Utility, Utils Marginal Utility, Utils Units consumed per meal Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7 0 1 2 3 4 5 6 7 0 10 18 24 28 30 30 28 10 8 6 4 2 0 -2 The Rational Utility Maximizer Marginal utility
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Lecture3 - Demand: The Benefit Side of The Market LECT U RE...

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