Lecture 9 - Econ 201 Lecture 9 The Law of Demand: People do...

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Econ 201 Lecture 9 The Law of Demand: People do less of what they want to do as the cost of doing it rises. The cost of an activity, good, or service involves not just monetary costs, but nonmonetary costs as well. Example 9.1. "Free" Häägen-Däs ice cream. To help celebrate the re-opening of Beebe Lake, the local Häägen-Däs supplier set up a booth next to the lake and offered free ice cream. Who was pleased about this offer? Who was displeased? "Needs" vs. "Wants" "Californians don't have nearly as much water as they need." vs. "Californians don't have nearly as much water as they want when the price of water is very low." •Rice farming in the Sacramento valley •Lush landscaping in San Diego vs. sparse landscaping in Santa Fe The Rational Utility Maximizer Pepsi Consumption (cans/wk) Utility from Pepsi consumption (utils/wk) 0 0 1 10 2 15 3 19 4 22 5 24 6 25 1. Utility increases with consumption 2. Beyond some point, the additional utility from extra consumption declines. Definition . The marginal utility from consuming a good is the additional utility that results from consuming an additional unit of the good. Definition. The law of diminishing marginal utility says that as consumption of a good increases beyond some point, the additional utility that results from an additional unit of the good declines. Exceptions to the law of diminishing marginal utility: The unfamiliar food or melody.
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2 Pepsi Consumption (cans/wk) Utility from Pepsi consumption (utils/wk) Marginal utility from Pepsi consumption (utils/can) 0 0 10 1 10 5 2 15 4 3 19 3 4 22 2 5 24 1 6 25 Example 9.2. How many ostrich burgers should Tom consume each week and how many mango milkshakes? Tom derives all of his nourishment from only two foods: ostrich burgers and mango milkshakes. His utility from consuming each depends on the amount he consumes in the manner shown in the table below. Ostrich burgers cost $8 per pound and mango milkshakes cost $4 per pint. If Tom has $20 per week to spend on food, what combination of the two should he eat? burgers (lb./wk) Utils/wk from burgers Shakes (pints/wk) Utils/wk from shakes 0 0 0 0 .5 10 1 20 1 16 2 30 1.5 20 3 32 2 22 4 33 2.5 23 5 33 Method 1 . First list all the combinations of burgers and shakes that cost $20/wk, and then see which one delivers the highest total utility. Combinations of burgers and shakes that cost $20 per week
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This note was uploaded on 12/24/2011 for the course ECON 201 taught by Professor Staff during the Spring '08 term at Oregon State.

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Lecture 9 - Econ 201 Lecture 9 The Law of Demand: People do...

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