Microeconomics
Essay by 24 • April 17, 2011 • 1,039 Words (5 Pages) • 1,421 Views
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 different than a change in the price a of $1 can of beer by $1. The auto's price is rising by a fraction of a percent while the beer price is rising 100 percent.
b. Percentages also make it possible to compare elasticities of demand for different products.
Elasticity (page 362, Table 20.2)
* E > 1  demand is elastic
* Consumers are very responsive to changes in prices
* WHY?
1. Luxuries
2. Availability of Substitutes (more substitutes  elasticity)
3. "Big Ticket" items - Relative price to income
4. Long Run is more elastic than short run
* Examples: fast food, airline travel,
* E < 1  demand is inelastic
* Consumers are not responsive to changes in prices
* WHY?
1. Necessities (toothpaste)
2. No available substitutes
3. Cheaper goods
4. Short run is more inelastic than long run
* Examples: cigarettes, coffee, gasoline, electricity
Because the price of a good affects E, the value of E changes along a demand curve*
Total Revenue
Amount of money received from product sales and is determined by Quantity Sold & Price
Total Revenue = Price X Quantity Sold
* Price hike increases TR only if demand is inelastic (E1)
* Price hike does not change TR if demand is unitary-elastic (E=1)
*
Impact of a price change on TR depends on the (changing) price elasticity of demand*
When the determinants of demand change (income, tastes, expectations, and other goods), the entire demand curve shifts.
Movement along the demand curve represents consumer response to a change in PRICE  the magnitude of the movement is expressed in price elasticity.
Other Elasticities: (page 368, Table 20.4)
1. Income Elasticity
Measure of consumer responses to changes in income
Income elasticity = %change in Qd
% change in income
* Normal goods - consumers purchase more as income rises
* Inferior goods - quantity demanded falls when income rises
1. A positive income elasticity indicates a normal or superior good.
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