How much coffee can you drink ? One cup, two, three, four ? How
does Dunkin Donuts get you to buy more coffee after lunch ?
Slide 2
They offer you a dealbuy a large coffee, get a free muffin or
donut Dunkin Donuts knows ALL about the Principle of Diminishing
Marginal Utility !!!
Slide 3
Law of Diminishing Marginal Utility Utility the sense of
well-being, satisfaction or pleasure a person derives from
consuming a good or service Utility Maximization economists assume
people try to allocate their incomes to maximize their satisfaction
Underlying Assumption: the more we consume, the more utility we
have (at least, up to a point) As we consume more and more of a
particular commodity, there tends to be a decline in the additional
satisfaction we get from consuming Example: the first cookie may
taste great, but if you eat a whole package, the last one consumed
usually gives much less additional pleasure!
Slide 4
Principles of Microeconomics, 2nd Canadian EditionSlide
1-4Copyright 2005 McGraw-Hill Ryerson Limited FIGURE 4.2 Lamar s
Total Utility from Ice Cream Consumption
Slide 5
Principles of Microeconomics, 2nd Canadian EditionSlide
1-5Copyright 2005 McGraw-Hill Ryerson Limited TABLE 4.2 Total and
Marginal Utility from Ice Cream Consumption
Slide 6
Marginal Utility The additional utility gained from consuming
an additional unit of a good (or service) Diminishing Marginal
Utility As the consumption of a good or service increases, the
additional utility gained from an extra unit of the commodity tends
to decline I.e., the next unit of the good does not give as much
utility as the previous one E.g. the second cookie eaten gives more
pleasure than the 22nd cookie eaten
Slide 7
Law of Diminishing Marginal Utility In simpler terms It
explains the spending patterns of customers and states that each
additional purchase of a product or service by a given customer
will be less satisfying than the previous purchase.
Slide 8
Connection. The Law of diminishing marginal utility helps
explain why the demand curve slopes down to the right. Since the
marginal utility of a good diminishes as more is consumed, people
would only be willing to buy more if the price were reduced.
Slide 9
Optimal Consumption The affordable combination of goods
consumed that yields the highest total utility for the individual
consumer If consumption spending is not optimally allocated, it is
possible to increase total utility by reallocating expenditure
spending $1 less on one good and switching that $1 spending to a
good with greater marginal utility will increase total utility
Slide 10
Shifts in the Demand Curve
Slide 11
Principles of Microeconomics, 2nd Canadian EditionSlide
1-11Copyright 2005 McGraw-Hill Ryerson Limited FIGURE 3.7 An
Increase in the Quantity Demanded versus an Increase in Demand
Panel (a): An increase in quantity demanded is represented by a
downward movement along the demand curve as price falls. Panel (b):
An increase in demand is represented by an outward shift on the
demand curve. Increase in quantity demanded Increase in demand
D
Slide 12
Aggregate (Market) Demand What events would increase or
decrease the aggregate or market demand for goods and services?
Shift to the Right = More Demand at any given price Shift to the
Left = Less Demand at any given price Shifts caused by a number of
different factors that influence a consumers preference towards a
particular good or service.
Slide 13
Think Pair - Share Brainstorm ideas of what you think may be a
factor that shifts the demand curve
Slide 14
1. Change in Income A raise in income will increase demand for
normal goods (cars) and decrease demand for inferior goods (ride a
bus) Conversely, a decrease in income will increase demand for
inferior goods (ride a bus) and decrease demand for normal goods
(cars)
Slide 15
2. Price of Related Goods Substitute Goods A rise in the price
of one (e.g. butter) may increase the demand for the substitute (
margarine) This is a direct relationship Complementary Goods An
increase in the price of one good ( e.g cameras) will decrease the
demand for the complementary good (film/memory cards). This is an
inverse relationship
Slide 16
3. Change of Tastes If you like a good or service, you will buy
more of it. Example: Your favorite player gets traded from the
Montreal Canadiens to the Toronto Maple Leafs, your demand for
Maple Leafs apparel will increase. (Shift the demand curve to the
right)
Slide 17
4. Expectations If the price of gas is expected to increase the
next day, the current demand for gas will increase.
Slide 18
5. Demographics Number and Kinds of Buyers in the Market can
change demand Baby Boomers are getting ready to retires Increased
Demand for: More housing in Florida and Arizona Assisted Living
Complexes Walkers Wheelchairs
Slide 19
6. Seasonality More lemonade will be demanded More bathing
suits will be demanded More sun tan lotion will be demanded
Slide 20
7. Trends & Advertising Advertising creates trends Gap
Everybody in vests! Everybody in leather Everybody in stripes Some
advertising can decrease demand SUV = Terrorism
Slide 21
Demand Shifts create a New Equilibrium Type of ShiftPrice
(Eqm)Quantity d (Eqm) LeftDecreases RightIncreases
Slide 22
Principles of Microeconomics, 2nd Canadian EditionSlide
1-22Copyright 2005 McGraw-Hill Ryerson Limited The Effect on the
Market for Tennis Balls of a Decline in Court Rental Fees When the
price of a goods complement falls, demand for the good shifts
right, causing equilibrium price and quantity to rise. FIGURE 3.11
S D D 40 58 1.40 1.00
Slide 23
Shifts in the Supply Curve
Slide 24
Aggregate (Market) Supply What events would increase or
decrease the aggregate or market supply for goods and services?
Shift to the Right = More Supply at any given price Shift to the
Left = Less Supply at any given price Shifts caused by a number of
different factors that influence the actions of a seller or
supplier of a good or service.
Slide 25
Think Pair - Share Brainstorm ideas of what you think may be a
factor that shifts the supply curve
Slide 26
Determinants of Supply Cost of resources (raw materials) or
labour Technology (produce more products faster & more
efficiently) results in lower cost of production Taxes Subsidies
(Govt grants) Related Goods ( e.g corn, wheat) Expectations Number
of Sellers in the Market
Slide 27
Supply Shifts create a New Equilibrium Type of ShiftPrice
(Eqm)Quantity s (Eqm) LeftIncreasesDecreases
RightDecreasesIncreases
Slide 28
Principles of Microeconomics, 2nd Canadian EditionSlide
1-28Copyright 2005 McGraw-Hill Ryerson Limited FIGURE 3.# The
Effect on the Skateboard Market of an Increase in the Price of
Fiberglass S S D 8001000 80 60
Slide 29
Principles of Microeconomics, 2nd Canadian EditionSlide
1-29Copyright 2005 McGraw-Hill Ryerson Limited The Effect on the
Market for New Houses of a Decline in Carpenters Wage Rates When
input prices fall, supply shift right, causing equilibrium price to
fall and equilibrium quantity to rise. FIGURE 3.8 S D S 160 150
4050
Slide 30
Principles of Microeconomics, 2nd Canadian EditionSlide
1-30Copyright 2005 McGraw-Hill Ryerson Limited FIGURE 3.15 Four
Rules Governing the Effects of Supply and Demand Shifts An increase
in demand will lead to an increase in both the equilibrium price
and quantity. A decrease in demand will lead to a decrease in both
equilibrium price and quantity. An increase in supply will lead to
a decrease in the equilibrium price and an increase in the
equilibrium quantity. A decrease in supply will lead to an increase
in the equilibrium price and a decrease in the equilibrium
quantity.
Slide 31
Principles of Microeconomics, 2nd Canadian EditionSlide
1-31Copyright 2005 McGraw-Hill Ryerson Limited Simultaneous Shifts
In the real world, several things can happen at the same time,
Suppose: Demand decreases and Supply increases Demand shifts left
Lower price, lower quantity Supply shifts right Lower price, higher
quantity We can predict that price will fall But what happens to
quantity? We must know the relative magnitude of the shifts Which
effect will be larger in impact ? Economic Theory alone cannot tell
us whether the shift in supply will outweigh the shift in demand
but economic theory does tell us where to look for the answer
Slide 32
Principles of Microeconomics, 2nd Canadian EditionSlide
1-32Copyright 2005 McGraw-Hill Ryerson Limited FIGURE 3.16 The
Effects of Simultaneous Shifts in Supply and Demand When demand
shifts left and supply shifts right, equilibrium price falls, but
equilibrium quantity may either rise [panel (b)] or fall [panel
(a)]. S S D D S S D D QQ Q P P P
Slide 33
Practice Questions Do several practice questions. Shifts with
Supply & Demand .then Assignment!