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 utilityfrom consuming a good is the additional utility that results from consuming an additional unit of the good. Definition. Thelaw 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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