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Unformatted text preview: Week #3 Demand and Utility Review from last week: Demand and Supply in a Competitive Market Behaviour of buyers and behaviour of sellers are both affected by the price of the good. Movements in price will bring these planned behaviours together in equilibrium. Graphically, changes in price cause movements along demand and supply curves. Changes in any underlying factor cause shifts in these demand or supply goods. For demand curves, these underlying factors include price of a substitute, price of a complement, consumer incomes, population and tastes. For supply curves, the underlying factors are the price of labour, the price of capital, the price of other inputs, and technology. Explaining/Exploring Demand Curves Why are demand curves negatively sloped? How do we interpret a point on the demand curve? How do we interpret an area under the demand curve? How do demand curves relate to behaviour of consumers and wellbeing of consumers? Beginning of an answer. Demand curves reflect the utility (or wellbeing, or satisfaction, or happiness) of consumers measured in dollars. Demand curves can be used to measure the willingnesstopay for a good by consumers Invididuals who consume are making decisions designed to maximize their own wellbeing (utility), with the income they have available. Imagine Fred has a utility function for hamburgers per month where Q = # of hamburgers. We assume (a bit unusual, but convenient) that U is measured in dollars (the value of wellbeing to Fred) Freds utility function U = 20Q  Q 2 U is total utility If Q = 1, U = If Q = 2, U = If Q = 3, U = If Q = 4, U = $64 If Q = 5, U = $75 If Q = 6, U = $84 If Q = 7, U = $91 And so on Draw and label the total utility function. Notice its shape. Perhaps you can see that dU/dQ = 20  2Q dU/dQ is marginal utility Marginal utility is positive, but as Q increases, this gets smaller (it diminishes d 2 U/dQ 2 < 0  this is called [the assumption of] diminishing marginal utility) If Q = 1, U = $19, dU/dQ = If Q = 2, U = $36, dU/dQ = If Q = 3, U = $51, dU/dQ = If Q = 4, U = $64, dU/dQ = $12 If Q = 5, U = $75, dU/dQ = $10 If Q = 6, U = $84, dU/dQ = $8 If Q = 7, U = $91, dU/dQ = $6 Draw and label the marginal utility function....
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 Fall '09
 Cleverland

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