Lecture_4 - Lim Boon Tiong, Dept of Economics, NUS Semester...

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Lim Boon Tiong, Dept of Economics, NUS Semester 1, AY2008-09 1 EC1301 Principles of Economics Week 4
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Lim Boon Tiong, Dept of Economics, NUS Semester 1, AY2008-09 2 Topics 1. Consumer Choice Using Utility Theory (Textbook: Chapter 22, minus the Appendix) Concept of Utility Budget Constraint Utility maximization Equimarginal Rule The Marginal Benefit Curve The Consumer’s Demand Curve The Income and Substitution Effects 2. Competitive Market Equilibrium and Allocative Efficiency (Textbook: Chapter 21) Concepts of Consumer Surplus and Producer Surplus Allocative Efficiency Market Equilibrium and Efficiency Efficiency loss arising from Government Intervention Deadweight Loss Price Regulation Effect of taxation Burden of Taxation
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Lim Boon Tiong, Dept of Economics, NUS Semester 1, AY2008-09 3 Utility Theory and Individual Choice Behavioral Science explains why people do what they do Economics: – Seeks an analysis simple enough to apply to policy problems People do what they do because it is their rational choice in the pursuit of self-interest – Two things determine what people do: 1. The satisfaction or pleasure they get from their activity Utility is the satisfaction one expects to get from carrying out the activity 2. The cost of the activity Utility Maximization
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Lim Boon Tiong, Dept of Economics, NUS Semester 1, AY2008-09 4 Total and Marginal Utility With respect to a good , Total Utility – The satisfaction experienced from consuming the good, ceteris paribus . – measured in utils Marginal Utility – The change in total utility from consuming one additional unit of the good, ceteris paribus Principle of diminishing marginal utility – After some point, the marginal utility decreases as the rate of consumption of the good increases, ceteris paribus.
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Lim Boon Tiong, Dept of Economics, NUS Semester 1, AY2008-09 5 Consumer Choice Consider Crusoe in the markets with only two goods: coconuts and fish. Income = $30 per week Prices: – Coconuts: $1 each – Fish: $3 each
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Lim Boon Tiong, Dept of Economics, NUS Semester 1, AY2008-09 6 Consumer Choice: Budget Constraint Coconuts Fish xy 30 0 27 1 24 2 21 3 18 4 15 5 12 6 97 68 39 01 0 Cost of ( , ) $1 $3 $( 3 ) Income $30 33 0 x y x y =+ = += 0 2 4 6 8 10 12 0 5 10 15 20 25 30 35 x coconuts per week y fish per week Budget Line Bundle Budget Set ={affordable bundles}
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Lim Boon Tiong, Dept of Economics, NUS Semester 1, AY2008-09 7 Total and Marginal Utility Bundle Coconuts Fish Utility xy u v U 30 0 27 1 558 48 606 24 2 540 93 633 21 3 516 135 651 18 4 486 171 657 15 5 450 201 651 12 6 396 225 621 9 7 324 243 567 6 8 234 255 489 3 9 126 261 387 01 0 (27,1) (27) (1) 558 48 606 Uu v =+ =
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Lim Boon Tiong, Dept of Economics, NUS Semester 1, AY2008-09 8 Consumer Choice: Budget Constraint 1 Ans: The "value" of fish 3 Coconuts Fish xy 30 0 27 1 24 2 21 3 18 4 15 5 12 6 97 68 39 01 0 0 2 4 6 8 10 12 0 5 10 15 20 25 30 35 x coconuts per week y fish per week Bundle What is the opportunity cost of a a coconut?
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This note was uploaded on 03/19/2012 for the course ARTS EC1301 taught by Professor Forgot during the Fall '08 term at National University of Singapore.

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Lecture_4 - Lim Boon Tiong, Dept of Economics, NUS Semester...

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