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Chapter20(5)

# Chapter20(5) - Chapter(20 5 in the split The Demand for...

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Chapter (20) 5 in the split: The Demand for Goods DEMAND CURVE One of the determinants of demand is taste or desir e. We measure desires by the pleasure, satisfaction or utility obtained from a good or a service. The more we desire a good or the more utility we obtain from it, the more we are willing to pay for it. Total Utility Vs Marginal Utility Total Utility (TU): measures the satisfaction derived from the entire consumption of a product. This could be the total utility from drinking three cups of cappuccino. Total utility usually increases with additional amounts of a good consumed. Then TU(3 cups) > TU(2 Cups). That is, total utility of consuming 3 cups is greater than total utility of consuming two cups … and so on. Marginal Utility (MU): The utility derived from the last or an additional unit is called marginal utility. Marginal Utility = Δtotal Utility / Δquantity MU = ΔTU / ΔQ Example: Cups TU MU= ΔTU / ΔQ 0 0 - 1 50 (50-0)/(1-0) = 50 2 80 (80-50)/(2-1) =30 3 100 20 In this example, the utility derived from each additional cup/unit of cappuccino consumed decreases as more units of a good are consumed. This is a universal phenomenon and applies to many goods. Economists have fashioned a law around it, and called the law of diminishing marginal utility . It states that each successive unit of a good consumed yields less additional or marginal utility.

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Example: Eating Popcorn (boxes) at the Movies: Boxes TU MU= ΔTU / ΔQ 0 0 - 1 30 30 2 50 20 3 60 10 4 65 5 5 65 0 6 62 -3
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Chapter20(5) - Chapter(20 5 in the split The Demand for...

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