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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 ...