Utilidade Marginal
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Transcript of Utilidade Marginal
Demand: The Benefit Side of the Market
2
Law of Demand
Law of Demand People do less of what they want to do as
the cost of doing it risesRecall the Cost-Benefit Principle
Pursue an action if and only if its benefits are at least as great as its costs
Recall the Reservation PriceThe highest price we’d be willing to pay
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UtilityUtility represents the satisfaction people
derive from consumption activitiesUtility Maximization refers to people trying
and allocate their incomes to maximize their satisfaction
Normally, the more we consume, the more total utility we have (assumes goods are good)
At the margin however, incremental utility decreases in quantity – law of diminishing marginal utility
4
Marginal Utility
The additional utility gained from consuming an additional unit of the goodThe movement from one quantity to the next
The Law of Diminishing Marginal UtilityAs consumption of a good increases beyond some
point, the additional utility gained from an additional unit of the good tends to decline
I.E., when the second good does not double our utility
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Fig. 5.2 Total Utility from
Ice Cream Consumption
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Optimal Combination
When buying a variety of goods, how do we maximize total utility?
The optimal combination of goods to purchase is the affordable combination that yields the highest total utility
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Rational Spending RuleSuppose we are purchasing 2 goods: C and SSpending should be allocated across goods so that the marginal utility per dollar (“bang-for-the- buck”) is the same for each good
MUP
MUP
C
C
S
S
the marginal utility per dollar =MUP
The ratio of marginal utility to price must be the same for each good the consumer buys
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Rational Spending Rule
What should you do if: MUc/Pc > MUs/Ps ?E.g. you get 20 units of utility per dollar
spent on C and only 16 units of utility per dollar spent on S.
You should buy more C and less S to increase total utility without spending any more money.
But, what happens when you do this??
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Rational Spending Rule
As you buy more of the higher MU/P good its MU decreases (law of DMU).
As you buy less of the lower MU/P good its MU increases (law of DMU in reverse).
Eventually, the MU/P will be equal, and you cannot increase utility further by moving your dollars around.
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Exercise #4 p 138
Toby’s current marginal utility from consuming peanuts is 100 units of utility per once, and his marginal utility from cashews is 200 units of utility per once. The price of peanuts is 10 cents per once, and the price of cashews is 25 cents per once.
Is Toby maximizing his total utility from the consumption of these 2 goods?
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Exercise #4 p 138
Peanuts:MU/$ = 100/.10 = 1000
Cashews:MU/$ = 200/.25 = 800
Peanuts yield higher marginal utility per dollar and are therefore a “better deal”. He should consumer more peanuts and less cashews to increase total utility.
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Individual vs. Market Demand
How do we “add-up” the individual demands for all consumers in a market to form the market demand curve?
Option 1: add all prices and quantitiesOption 2: add all prices at each
quantity demandedOption 3: add quantities demanded at
each price
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Individual vs. Market Demand
Option 3 is correct: to find the market quantity demanded at each price, simply add the individual quantities demanded
This should make sense, because consumers face the same set of prices, but have different quantities demanded.
This is called “horizontal summation” because we are adding along the horizontal (quantity) axis
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Fig. 5.4 Individual and Market Demand Curves
for Canned Tuna
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Consumer Surplus
What happens when you purchase something for a price that is less than your maximum willingness to pay?
E.g. you are willing to pay $20,000 for a new car and you buy it for 18,000
You receive a “surplus” of benefit over cost = $2,000
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Consumer Surplus and Demand
Consumer surplus for a given quantity is therefore the difference between your maximum willingness to pay (reservation price) and what you actually paid (actual price).
CS = the sum of the difference between MB and MC (price) for all units consumed
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Consumer Surplus and Demand
Graphically then, CS is the area above the price line and below the demand curve, up to Q*
Here, CS = $200=½(base)(height)= ½(20)(20)
S
D
P 40
20
20 Q
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Consumer Surplus
Q MB (demand) MC (P)1 100 402 80 403 60 404 40 40
5 20 40
What is the optimal quantity to consume, and how much is consumer surplus?
Q* = 4 units (MC =MC) and CS = $120