Chapter 4 - Economics 101 Market Chapter 4: Demand: The...

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Economics 101 Chapter 4: Demand: The Benefit Side of the Market -Price and Quantity Demanded -In markets, price rations goods and services among competing users -The demand curve is a relationship between the quantity demanded and price -The “location” of the demand curve is determined by all the other determinants of demand, including non-monetary costs, such as waiting time, filling out registration, mail-in rebate or tax forms, etc. -It is assumed that, except for the price of the good, everything else that may affect demand is constant – in particular: -Quality is constant -Consumers’ incomes are unchanged -The prices of other goods are unchanged -Consumer tastes are unchanged, etc. -Needs vs. Wants and the Law of Demand -Once we have achieved bare subsistence levels of consumption, economists speak only in terms of wants -The Law of Demand -People do less of what they want to do as the cost of doing so rises - i.e. typically demand curves are downward sloping -Downward Sloping Demand Curves? -We assume that consumers are motivated by their self-interest and will decide to purchase more of a good or service only if it increases their sense of satisfaction or well-being -Why does the self-interested behaviour of consumes normally will lead to downward sloping demand curves? -The typical consumer faces scarcity of the means to satisfy his/her wants -The Typical Trade-Off : -Buying more of one good means buying less of something else -Rational Consumer Behavior -Buy more of a good only if the additional benefit is greater than the opportunity costs – i.e. Loss of satisfaction from having to consume less of something else -Suppose you are in a situation where you feel you are achieving the most you can from your scarce resources – eg. On a weekly basis, you are using your income to buy so many units of good x, so many units of good y, etc. -Hence you are Rational and you are maximizing the benefits you can get given your income and the existing prices -Now suppose that the price of good x falls, how would you react to this? -The fall in the price means that you will have to sacrifice less of other goods in order to consumer more of good x = i.e. the Opportunity Cost of x has fallen and, therefore, you can make yourself better off if you buy more of good x, -Hence you have a downward sloping demand curve for good x -Utility -To formalize the analysis of downward sloping demand economists use the notion of Utility -Utility refer to a quantitative measure representing the satisfaction people derive from consumption -Utility Maximization refers to the behaviour of people who try to maximize their utility (satisfaction) -Underlying Assumption: The more we consume, the more utility we have (at least, up to a point) -As we consume more and more of particular commodity, there tends to be a decline in the additional satisfaction we get from consuming
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-eg. The first cookie may taste great, but if you eat the whole package, the last one consumed
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This note was uploaded on 01/08/2009 for the course ECON 101 taught by Professor Lemche during the Summer '05 term at The University of British Columbia.

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Chapter 4 - Economics 101 Market Chapter 4: Demand: The...

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