ECON 1 Lecture Notes 1022

ECON 1 Lecture Notes 1022 - o Substitution effect: when...

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ECON 1 Lecture Notes 10/22/10 Consumer Decision over Two Goods The two conditions for maximizing utility: 1. MU pizza / P pizza = MU coke / P coke (rational spending rule) 2. Spending on pizza + spending on coke = budget (exhaust budget) Why is diamond more expensive than water? - Water is more consumed by people - Less people get diamonds (not all can afford) - Marginal utility of water = low - Rational spending soon: MU diamond / P diamond = MU water / P water MU diamond >> MU water, P diamond >> P water Change in Quantity Demanded when Price Changes - what if the price of coke increases to $2/can?
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Unformatted text preview: o Substitution effect: when price of a good goes up, people buy more of its subs o Income effect: an increase in price decreases buyers purchasing pwr Derive Individual Demand Curve-use the utility maximization rule to decide the quantity demanded at diff prices Deriving Market Demand-horizontal summation o add your demand, Ambers demand, and get market demand Budget Constraint-analogous to PPC because o attainable bundles will be on or below budget constraint o absolute value of slope gives OC of good on the x-axis...
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