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Submitted by rkb416 on April 7, 2007
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Chapter 20: Elasticities of Demand and Supply
Chapter 21: Consumer Behavior and Utility Maximization
Demand willingness and ability to pay for goods and services
An individual's demand for a specific product is determined by these four factors:
Tastes (desire for this and other goods)
Income (of the consumer)
Expectations (for income, prices, tastes)
Other goods (their availability and prices)
The more pleasure a product gives us, the higher the price we'd be willing to pay for it
Utility expected pleasure or satisfaction
Total utility amount of satisfaction obtained from your entire consumption of a product
Marginal utility amount of satisfaction you get from consuming the last (marginal) unit of a product.
Marginal Utility = Change in total utility
Change in quality
MU is + TU
Law of Diminishing Utility = each successive unit of a good consumed yields less additional utility (satisfaction)
Thrill diminishes with each mouthful
With given income, tastes, expectations, and prices of other goods & services, people are willing to buy additional quantities of a good only if its price falls.
As MU diminishes so does our willingness to pay
LAW OF DEMAND (page 374, Figure 21.1)
Price Elasticity (by how much the quantity demanded would fall if the price were raised)
The response of consumers to a change in price
%change in quantity demanded / % change in price
Price Elasticity = % change in Qd
E % change in P
1. Emphasis: The percentages changes are compared, not the absolute changes.
a. Absolute changes depend on choice of units. For example, a change in the price of a $10,000 car by $1 and is very...
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