LEC 11,12,13 DEMAND AND CONSUMER BEH 2.ppt

8/20/2019 LEC 11,12,13 DEMAND AND CONSUMER BEH 2.ppt

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DEMAND AND CONSUMER

BEHAVIOUR – Utility Theoryand Derivation of Demand

Crve!


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IN THIS "ECTURE# $E SHA""STUD%

The Diamond&$ater'arado(

The Utility Theory

The "a) of Dimini!hin*Mar*inal Utility

E+imar*inal 'rin,i-le

$hy Demand Crve!Slo-e Do)n)ard.

Analyti,al Develo-ment!

in Utility Theory


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DIAMOND&$ATER 'ARADO/

The 'arado( of Adam Smith01Nothin* i! more !efl than )ater23t it )ill !,ar,e -r,ha!e anythin*4A diamond# on the other hand# ha!

!,ar,e any vale in !e2 3t a very*reat +antity of other *ood! may

fre+ently 3e had in e(,han*e forit45 6Smith# 7889:

Ho) ,an thi! 3e e(-lained.

Utility theory -rovide! a !oltion;


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UTI"IT% THEOR%

Utility i! a mea!re of the !ati!fa,tion#ha--ine!!# or 3enefit that re!lt! from the,on!m-tion of a *ood4

A til i! an artifi,ial ,on!tr,t !ed tomea!re tility4

Total tility i! the total !ati!fa,tion a -er!on

re,eive! from ,on!min* a -arti,lar+antity of a *ood4Mar*inal tility i! the additional tility a

-er!on re,eive! from ,on!min* an

additional nit of a -arti,lar *ood4


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"A$ O< DIMINISHIN= MAR=INA"UTI"IT%

The mar*inal tility *ained 3y ,on!min*e+al !,,e!!ive nit! of a *ood )ill de,linea! the amont ,on!med in,rea!e!4

The total tility of !omethin* ,an 3e ri!in* a!the mar*inal tility of that !omethin* i! fallin*4


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TOTA" UTI"IT%# MAR=INA" UTI"IT%# AND THE"A$ O< DIMINISHIN= MAR=INA" UTI"IT%

Both total tility and mar*inal tility are

e(-re!!ed in til!4Mar*inal tility i! the ,han*e in total tilitydivided 3y the ,han*e in the +antity,on!med of the *ood# MU > ?TU@?4


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TOTA" UTI"IT%# MAR=INA" UTI"IT%# AND THE"A$ O< DIMINISHIN= MAR=INA" UTI"IT%


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"A$ O< DIMINISHIN= MAR=INA"UTI"IT% – A''"ICATION

The la) of dimini!hin* mar*inal tility i!3a!ed on the idea that if a *ood ha! a varietyof !e! 3t only 7 nit of the *ood i!

availa3le# then the ,on!mer )ill !e the fir!tnit to !ati!fy hi! or her mo!t r*ent )ant4 If nit! are availa3le# the ,on!mer )ill !e

the !e,ond nit to !ati!fy a le!! r*ent )ant4


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NO INTER'ERSONA" UTI"IT%COM'ARISON

Cation0 The tility o3tained 3y one -er!on,annot 3e !,ientifi,ally or o3e,tively,om-ared )ith the tility o3tained from the

!ame thin* 3y another -er!on 3e,a!e tilityi! !3e,tive4


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DIAMOND&$ATER 'ARADO/RESO"VED

The total tility of )ater i! hi*h 3e,a!e)ater i! e(tremely !efl4

The total tility of diamond! i! lo) in,om-ari!on 3e,a!e diamond! are not a!

!efl a! )ater4 The mar*inal tility of )ater i! lo)

3e,a!e )ater i! !o -lentifl that -eo-leend - ,on!min* it at lo) mar*inal tility4

The mar*inal tility of diamond! i! hi*h3e,a!e diamond! are !o !,ar,e that-eo-le end - ,on!min* them at hi*hmar*inal tility4

Do -ri,e! refle,t total or mar*inal tility.Mar*inal tility4


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THE EUIMAR=INA" 'RINCI'"E

The fndamental ,ondition of ma(imm !ati!fa,tion ortility i! the e+imar*inal -rin,i-le4

It hold! that a ,on!mer *et! ma(imm !ati!fa,tion ortility# )hen the mar*inal tility of the la!t dollar !-ent ona *ood i! e(a,tly the !ame a! the mar*inal tility of thela!t dollar !-ent on any other *ood4

$hy m!t thi! ,ondition hold.Be,a!e# the ,on!mer )ill in,rea!e the !e of *ood *ivin*more MU# ntil the MU! of all *ood! are e+al4 Conver!ely# ifany *ood *ive! le!! MU# he@!he )ill 3y le!! of it ntil the MU

of the la!t R! !-ent on it ri!e! 3a, to the ,ommon level4


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THE EUIMAR=INA" 'RINCI'"E

"et! tae an e(am-le to nder!tand thi! -rin,i-le0&

%or family *oe! to for ty-e! of -la,e! for eatin* ot in theevenin*4

The!e -la,e! are 'iFFa Ht 6'H:# Chine!e 6CH:# 'earlContinental 6'C: and Galil Tia 6GT:4

Initially MU@' of ea,h eatin* -la,e i! different2 3t after

nder!tandin* the -ra,ti,al a--li,ation of the 'rin,i-le ofE+imar*inal 'rin,i-le# yo ,han*e yor rotine a! follo)!0&

Choi

,e

MU'H @''H MUCH @'CH MU'C @''C MUGT @'GT

A 9 7 8

B 8 J 9 84

C K K K J


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TALE ANOTHER E/AM'"E

%o )ant to mae a !tdy !,hedle after yo ,ome tono) yor !,ore! in initial +iFFe!4

%o a--ly the 'rin,i-le of E+imar*inal 'rin,i-le to*et ma(imm mar*inal tility of the time yo !-endon yor !tdie!4

Stdy the ,hoi,e! *iven 3elo)2 )hi,h one )old yo-refer4

Choi

,e

MUECO @TECO MUEN= @TEN= MUM=T @'M=T MUMATH

@'MATH

A 9 J

B 9 8 K

C 98 98 98 98


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$H% DEMAND CURVES S"O'EDO$N$ARD.

Hold the ,ommon MU -er R! of in,ome,on!tant2 then in,rea!e -ri,e of *ood 7MU*ood7 @'7 MU*ood @'

Con!mer red,e! the !e of *ood7 a! it ha!de,rea!ed hi!@her in,ome4

Red,ed ,on!m-tion of *ood7 )ill rai!e it!MU ntil it a*ain e+al! MU -er R! !-ent on

other *ood!4A hi*her -ri,e for a *ood red,e! the

,on!mer! de!ired ,on!m-tion of that,ommodity2 thi! !ho)! )hy demand ,rve!

!lo-e do)n)ard4


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• 'eo-le differ in their ta!te!

• Some have hi*h in,ome!# !ome lo)4

• Some *reatly de!ire ,offee2 other!-refer tea4

• To o3tain the total maret demand,rve# )e ,al,late the !m total of)hat all the different ,on!mer!,on!me at ea,h -ri,e4


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CONSUMER SUR'"US

• The *a- 3et)een the total tility of a*ood and it! total maret vale i!

,alled Con!mer Sr-l!4

• The !r-l! ari!e! 3e,a!e# )e re,eivemore than )e -ay for a! a re!lt of

"a) of dimini!hin* mar*inal tility4


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• $e -ay the !ame amont for ea,h nit of,ommodity that )e 3y# from the fir!t to the

la!t4• Th! )e -ay for ea,h nit )hat the la!t nit

i! )orth4

• Bt# 3y la) of dimini!hin* mar*inal tility#

the earlier nit! are )orth more to ! thanthe la!t2 th! )e enoy a !r-l! of tility onea,h of the!e earlier nit!4

CONSUMER SUR'"US


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• We can also apply the concept ofconsumer surplus to a market as a whole.

CONSUMER SUR'"US IN AMARLET


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• Be,a!e ,on!mer! -ay the -ri,e ofthe la!t nit for all nit! ,on!med#they enoy a !r-l! of tility over ,o!t4

• Con!mer !r-l! mea!re! the e(travale that ,on!mer! re,eive a3ove)hat they -ay for a ,ommodity4

CONSUMER SUR'"US IN AMARLET


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• E,onomi!t! !e the ,on,e-t of ,on!mer!r-l!# )hen they -erform a cost-benefit

analysis.• Thi! ,on,e-t attem-t! to determine the ,o!t!

and 3enefit! of a *overnment -ro*ram4

• =enerally an e,onomi!t )old re,ommend

that a free road !hold 3e 3ilt if it! total,on!mer !r-l! e(,eed! it! ,o!t!4

A''"ICATION O< CONSUMERSUR'"US


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• Ho) ,an the *overnment de,ide on thevale of 3ildin* a ne) hi*h)ay or of-re!ervin* re,reation !ite.

• S--o!e a ne) hi*h)ay ha! 3een-ro-o!ed# 3ein* free to all# it )ill 3rin* inno revene4

• The vale to !er! )ill 3e fond in time!aved or in !afer tri-! and ,an 3emea!red 3y individal ,on!mer !r-l!4

A''"ICATION O< CONSUMERSUR'"US


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LEC 11,12,13 DEMAND AND CONSUMER BEH 2.ppt

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