Unit 2: Supply, Demand,

and Consumer Choice

1
Unit 2: Supply, Demand,
and Consumer Choice
Length: 3 Weeks
Chapters: 3, 20, and 21
Activity: Pearl Exchange
Assignment: PS #2
2
DEMAND DEFINED
What is Demand?
Demand is the different quantities of goods
that consumers are willing and able to buy at
different prices.
(Ex: Bill Gates is able to purchase a Ferrari, but if
he isnt willing he has NO demand for one)

What is the Law of Demand?
The law of demand states There is an
INVERSE relationship between price and
quantity demanded
3
Why does the Law of Demand occur?
The law of demand is the result of three
separate behavior patterns that overlap:
1.The Substitution effect
2.The Income effect
3.The Law of Diminishing Marginal
Utility
We will define and explain each
4
If the price goes up for a product, consumer
but less of that product and more of
another substitute product (and vice versa)
1. The Substitution Effect
If the price goes down for a product, the
purchasing power increases for consumers -
allowing them to purchase more.
2. The Income Effect
Why does the Law of
Demand occur?
5
Utility = Satisfaction
We buy goods because we get utility from them
The law of diminishing marginal utility states that as
you consume more units of any good, the additional
satisfaction from each additional unit will eventually
start to decrease
In other words, the more you buy of ANY GOOD the
less satisfaction you get from each new unit.
Discussion Questions:
1. What does this have to do with the Law of Demand?
2. How does this effect the pricing of businesses?
3. Law of Diminishing Marginal Utility
Why does the Law of Demand occur?
U- TIL- IT- Y
6
The Demand Curve
A demand curve is a graphical representation
of a demand schedule.
The demand curve is downward sloping
showing the inverse relationship between price
(on the y-axis) and quantity demanded (on the
x-axis)
When reading a demand curve, assume all
outside factors, such as income, are held
constant. (This is called ceteris paribus)
Lets draw a new demand curve for
cereal
7
GRAPHING DEMAND
Q
o
$5


4


3


2


1
Price of Cereal
Quantity of Cereal
Demand
Schedule
10 20 30 40 50 60 70 80
8
Price
Quantity
Demanded
$5 10
$4 20
$3 30
$2 50
$1 80
Demand
Where do you get the Market Demand?
Q
Billy
Price Q Demd
$5 1
$4 2
$3 3
$2 5
$1 7
Jean Other Individuals
Price Q Demd
$5 0
$4 1
$3 2
$2 3
$1 5
Price Q Demd
$5 9
$4 17
$3 25
$2 42
$1 68
Price Q Demd
$5 10
$4 20
$3 30
$2 50
$1 80
Market
3
P
Q
2
P
Q
25
P
Q
30
P
$3 $3 $3 $3
D D D D
Shifts in Demand
CHANGES IN DEMAND
Ceteris paribus-all other things held constant.
When the ceteris paribus assumption is
dropped, movement no longer occurs along the
demand curve. Rather, the entire demand
curve shifts.
A shift means that at the same prices, more
people are willing and able to purchase that
good.
This is a change in demand, not a change in
quantity demanded
10
Changes in price
DONT shift
the curve!
Change in Demand
Q
o
$5


4


3


2


1
Price of Cereal
Quantity of Cereal
Demand
Schedule
10 20 30 40 50 60 70 80
11
Price
Quantity
Demanded
$5 10
$4 20
$3 30
$2 50
$1 80
Demand
What if cereal
makes you smarter?
Change in Demand
Q
o
$5


4


3


2


1
Price of Cereal
Quantity of Cereal
Demand
Schedule
10 20 30 40 50 60 70 80
12
Price
Quantity
Demanded
$5 10 30
$4 20 40
$3 30 50
$2 50 70
$1 80 100
Demand
D
2
Increase in Demand
Prices didnt change but
people want MORE
cereal
Change in Demand
Q
o
$5


4


3


2


1
Price of Cereal
Quantity of Cereal
Demand
Schedule
10 20 30 40 50 60 70 80
13
Price
Quantity
Demanded
$5 10
$4 20
$3 30
$2 50
$1 80
What if cereal
causes baldness?
Demand
Change in Demand
Q
o
$5


4


3


2


1
Price of Cereal
Quantity of Cereal
Demand
Schedule
10 20 30 40 50 60 70 80
14
Price
Quantity
Demanded
$5 10 0
$4 20 5
$3 30 20
$2 50 30
$1 80 60
Demand D
2
Decrease in Demand
Prices didnt change but
people want LESS cereal
What Causes a Shift in Demand?
5 Determinates (SHIFTERS) of Demand:

1. Tastes and Preferences
2. Number of Consumers
3. Price of Related Goods
4. Income
5. Future Expectations

Changes in PRICE dont shift the curve. It
only causes movement along the curve.
15
Prices of Related Goods
2. Complements are two goods that are bought
and used together.
If the price of one increase, the demand for the
other will fall. (or vice versa)
Ex: If price of skis falls, demand for ski boots will...
1. Substitutes are goods used in place of one
another.
If the price of one increases, the demand for the
other will increase (or vice versa)
Ex: If price of Pepsi falls, demand for coke will
The demand curve for one good can be affected by a
change in the price of ANOTHER related good.
16
Income
2. Inferior Goods
As income increases, demand falls
As income falls, demand increases
Ex: Top Romen, used cars, used cloths,
1. Normal Goods
As income increases, demand increases
As income falls, demand falls
Ex: Luxury cars, Sea Food, jewelry, homes
The incomes of consumer change the demand, but
how depends on the type of good.
17
P
Q Cereal
o
$3


$2



D
1
Price of Cereal
Quantity of Cereal
10 20
Change in Qd vs. Change in Demand
A C
B
There are two ways to increase
quantity from 10 to 20
D
2
1. A to B is a change
in quantity
demand (due to a
change in price)
2. A to C is a change
in demand (shift
in the curve)
Practice
First, identify the determinant (shifter) then
decide if demand will increase or decrease
19
Shifter
Increase or
Decrease
Left or Right
1
2
3
4
5
6
7
8
Practice
Hamburgers (a normal good)
1. Population boom
2. Incomes fall due to recession
3. Price for Carne Asada burritos falls to $1
4. Price increases to $5 for hamburgers
5. New health craze- No ground beef
6. Hamburger restaurants announce that they
will significantly increase prices NEXT month
7. Government heavily taxes shake and fries
causes their prices to quadruple.
8. Restaurants lower price of burgers to $.50
First identify the determinant (Shifter). Then
decide if demand will increase or decrease
20
Supply
21
Supply Defined
What is supply?
Supply is the different quantities of a good that sellers
are willing and able to sell (produce) at different prices.

What is the Law of Supply?
There is a DIRECT (or positive) relationship between
price and quantity supplied.
As price increases, the quantity producers make
increases
As price falls, the quantity producers make falls.
Why? Because, at higher prices profit seeking
firms have an incentive to produce more.
EXAMPLE: Mowing Lawns
22
GRAPHING SUPPLY
Q
o
$5


4


3


2


1
Price of Cereal
Quantity of Cereal
Supply
Schedule
10 20 30 40 50 60 70 80
23
Price
Quantity
Supplied
$5 50
$4 40
$3 30
$2 20
$1 10
Supply
GRAPHING SUPPLY
Q
o
$5


4


3


2


1
Price of Cereal
Quantity of Cereal
Supply
Schedule
10 20 30 40 50 60 70 80
24
Price
Quantity
Supplied
$5 50
$4 40
$3 30
$2 20
$1 10
Supply
What if new
companies start making
cereal?
Change in Supply
Q
o
$5


4


3


2


1
Price of Cereal
Quantity of Cereal
Supply
Schedule
10 20 30 40 50 60 70 80
25
Supply
S
2
Price
Quantity
Supplied
$5 50 70
$4 40 60
$3 30 50
$2 20 40
$1 10 30
Increase in Supply
Prices didnt change but
there is MORE cereal
produced
Change in Supply
Q
o
$5


4


3


2


1
Price of Cereal
Quantity of Cereal
Supply
Schedule
10 20 30 40 50 60 70 80
26
Price
Quantity
Supplied
$5 50
$4 40
$3 30
$2 20
$1 10
Supply
What if a drought
destroys corn and wheat
crops?
Change in Supply
Q
o
$5


4


3


2


1
Price of Cereal
Quantity of Cereal
Supply
Schedule
10 20 30 40 50 60 70 80
27
Supply
S
2
Price
Quantity
Supplied
$5 50 30
$4 40 20
$3 30 10
$2 20 1
$1 10 0
Decrease in Supply
Prices didnt change but
there is LESS cereal
produced

6 Determinants (SHIFTERS) of Supply
1. Prices/Availability of inputs (resources)
2. Number of Sellers
3. Technology
4. Government Action: Taxes & Subsidies

Subsidies
A subsidy is a government payment that supports a business or market.
Subsidies cause the supply of a good to increase.
Taxes
The government can reduce the
supply of some goods by placing an
excise tax on them. An excise tax
is a tax on the production or sale of
a good.
Regulation
Regulation occurs when the
government steps into a market to
affect the price, quantity, or quality of
a good. Regulation usually raises
costs.
5. Opportunity Cost of Alternative
Production
6. Expectations of Future Profit
Changes in PRICE dont shift the curve. It only
causes movement along the curve.
28
Supply Practice
First, identify the determinant (shifter) then
decide if supply will increase or decrease
29
Shifter
Increase or
Decrease
Left or Right
1
2
3
4
5
6
Supply Practice
Hamburgers
1. Mad cow kills 20% of cows
2. Price of burgers increase 30%
3. Government taxes burger producers
4. Restaurants can produce burgers and/or
tacos. A demand increase causes the
price for tacos to increase 500%
5. New bun baking technology cuts
production time in half
6. Minimum wage increases to $10
1. Which determinant (SHIFTER)?
2. Increase or decrease?
3. Which direction will curve shift?
30
Q
o
$5


4


3


2


1
P
Demand
Schedule
10 20 30 40 50 60 70 80
31
P Qd
$5 10
$4 20
$3 30
$2 50
$1 80
Supply
Schedule
P Qs
$5 50
$4 40
$3 30
$2 20
$1 10
Supply and Demand are put together to determine
equilibrium price and equilibrium quantity

Equilibrium Price = $3
(Qd=Qs)
Equilibrium Quantity is 30
D
S
Q
o
$5


4


3


2


1
P
Demand
Schedule
10 20 30 40 50 60 70 80
32
P Qd
$5 10
$4 20
$3 30
$2 50
$1 80
Supply
Schedule
P Qs
$5 50
$4 40
$3 30
$2 20
$1 10
Supply and Demand are put together to determine
equilibrium price and equilibrium quantity
D
S
What if the price
increases to $4?
Q
o
$5


4


3


2


1
P
Demand
Schedule
10 20 30 40 50 60 70 80
33
P Qd
$5 10
$4 20
$3 30
$2 50
$1 80
Supply
Schedule
P Qs
$5 50
$4 40
$3 30
$2 20
$1 10
D
S
At $4, there is disequilibrium. The quantity
demanded is less than quantity supplied.
Surplus
(Qd<Qs)
How much is the
surplus at $4?
Answer: 20
Q
o
$5


4


3


2


1
P
Demand
Schedule
10 20 30 40 50 60 70 80
34
P Qd
$5 10
$4 20
$3 30
$2 50
$1 80
Supply
Schedule
P Qs
$5 50
$4 40
$3 30
$2 20
$1 10
D
S
How much is the surplus if the price is $5?
Answer: 40
What if the price
decreases to $2?
Q
o
$5


4


3


2


1
P
Demand
Schedule
10 20 30 40 50 60 70 80
35
P Qd
$5 10
$4 20
$3 30
$2 50
$1 80
Supply
Schedule
P Qs
$5 50
$4 40
$3 30
$2 20
$1 10
D
S
At $2, there is disequilibrium. The quantity
demanded is greater than quantity supplied.
Shortage
(Qd>Qs)
How much is the
shortage at $2?
Answer: 30
Q
o
$5


4


3


2


1
P
Demand
Schedule
10 20 30 40 50 60 70 80
36
P Qd
$5 10
$4 20
$3 30
$2 50
$1 80
Supply
Schedule
P Qs
$5 50
$4 40
$3 30
$2 20
$1 10
D
S
Answer: 70
How much is the shortage if the price is $1?
Q
o
$5


4


3


2


1
P
Demand
Schedule
10 20 30 40 50 60 70 80
37
P Qd
$5 10
$4 20
$3 30
$2 50
$1 80
Supply
Schedule
P Qs
$5 50
$4 40
$3 30
$2 20
$1 10
D
S
When there is a
surplus, producers
lower prices
The FREE MARKET system automatically
pushes the price toward equilibrium.
When there is a
shortage, producers
raise prices
Shifting Supply and
Demand
38
Supply and Demand Analysis
Easy as 1, 2, 3
1. Before the change:
Draw supply and demand
Label original equilibrium price and quantity
2. The change:
Did it affect supply or demand first?
Which determinant caused the shift?
Draw increase or decrease
3. After change:
Label new equilibrium?
What happens to Price? (increase or decrease)
What happens to Quantity? (increase or decrease)
Lets Practice!
39
S&D Analysis Practice
Analyze Hamburgers
1. Price of sushi (a substitute) increases
2. New grilling technology cuts production
time in half
3. Price of burgers falls from $3 to $1.
4. Price for ground beef triples
5. Human fingers found in multiple burger
restaurants.

1. Before Change (Draw equilibrium)
2. The Change (S or D, Identify Shifter)
3. After Change (Price and Quantity After)
40
Double Shifts
Suppose the demand for sports cars fell at the
same time as production technology improved.
Use S&D Analysis to show what will happen to
PRICE and QUANTITY.

If TWO curves shift at the same
time, EITHER price or quantity
will be indeterminate.
41
Consumer Surplus is the difference
between what you are willing to pay
and what you actually pay.
CS = Buyers Maximum Price
Producers Surplus is the difference
between the price the seller received
and how much they were willing to sell
it for.
PS = Price Sellers Minimum
Voluntary Exchange Terms
42
S
P
Q
D
Consumer and Producers Surplus

$10

8

6
$5
4

2

1
10 2 4 6 8
CS
PS
43
Calculate the area of:
1. Consumer Surplus
2. Producer Surplus
3. Total Surplus
1. CS= $25
2. PS= $20
3. Total= $45
Unit 2: Supply, Demand,
and Consumer Choice
44
Government
Involvement
#1-Price Controls: Floors and Ceilings
#2-Import Quotas
#3-Subsidies
#4-Excise Taxes

45
#1-PRICE CONTROLS
Who likes the idea of having a price ceiling on
gas so prices will never go over $1 per gallon?
46
Q
o
$5


4


3


2


1
P
10 20 30 40 50 60 70 80
47
D
S
Shortage
(Qd>Qs)
Maximum legal price a seller can charge for a product.
Goal: Make affordable by keeping price from reaching Eq.
Gasoline
Does this
policy help
consumers?
Result:
BLACK
MARKETS
Price
Ceiling
Price Ceiling
To have an effect,
a price ceiling must be
below equilibrium
Q
o
$


4


3


2


1
P
10 20 30 40 50 60 70 80
48
D
S
Surplus
(Qd<Qs)
Minimum legal price a seller can sell a product.
Goal: Keep price high by keeping price from falling to Eq.
Corn
Does this
policy help
corn
producers?
Price Floor
Price Floor
To have an effect,
a price floor must be
above equilibrium
Practice Questions
1. Which of the following will occur if a legal price floor is
placed on a good below its free market equilibrium?
A. Surpluses will develop
B. Shortages will develop
C. Underground markets will develop
D. The equilibrium price will ration the good
E. The quantity sold will increase
A. A price ceiling causes a shortage if the ceiling price is
above the equilibrium price
B. A price floor causes a surplus if the price floor is below
the equilibrium price
C. Price ceilings and price floors result in a misallocation of
resources
D. Price floors above equilibrium cause a shortage
2. Which of the following statements about price control is true?
49
Are Price Controls Good or Bad?
To be efficient a market must maximize
consumers and producers surplus
Q
P
D
S
P
c
Q
e
CS
PS
50
Are Price Controls Good or Bad?
To be efficient a market must maximize consumers and
producers surplus
Price
FLOOR
Q
P
D
S
P
c
Q
e
Q
floor
DEADWEIGHT LOSS
The Lost CS and PS.
INEFFICIENT!
CS
PS
51
Are Price Controls Good or Bad?
To be efficient a market must maximize consumers and
producers surplus
Q
P
D
S
P
c
Q
e
CS
PS
52
Are Price Controls Good or Bad?
To be efficient a market must maximize consumers and
producers surplus
Price
CEILING
Q
P
D
S
P
c
Q
e
Q
ceiling
DEADWEIGHT LOSS
The Lost CS and PS.
INEFFICIENT!
CS
PS
53
#2 Import Quotas
A quota is a limit on number of exports.
The government sets the maximum amount that
can come in the country.
Purpose:
To protect domestic producers from a
cheaper world price.
To prevent domestic unemployment
54
International Trade and Quotas
Identify the following:
1. CS with no trade
2. PS with no trade
3. CS if we trade at
world price (P
W
)
4. PS if we trade at
world price (P
W
)
5. Amount we import at
world price (P
W
)
6. If the government sets
a quota on imports of
Q
4
- Q
2,
what happens
to CS and PS?
This graphs show the domestic
supply and demand for grain.
The letters represent area.
#3 Subsidies
The government just gives producers money.
The goal is for them to make more of the goods
that the government thinks are important.
Ex:
Agriculture (to prevent famine)
Pharmaceutical Companies
Environmentally Safe Vehicles
FAFSA

56
Result of Subsidies to Corn Producers
Q
o
Price of Corn
Quantity of Corn
57
S
S
Subsidy
Price Down
Quantity Up
Everyone
Wins, Right?
P
e
P
1
Q
e
Q
1
D
Unit 2: Supply, Demand,
and Consumer Choice
58
#4 Excise Taxes
Excise Tax = A per unit tax on producers
For every unit made, the producer must pay $
NOT a Lump Sum (one time only)Tax
The goal is for them to make less of the goods that
the government deems dangerous or unwanted.
Ex:
Cigarettes sin tax
Alcohol sin tax
Tariffs on imported goods
Environmentally Unsafe Products
Etc.

59
Excise Taxes
Q
o
$5


4


3


2


1
P
60
Supply
Schedule
P Qs
$5 140
$4 120
$3 100
$2 80
$1 60
D
S
40 60 80 100 120 140
Government sets a $2 per
unit tax on Cigarettes
Excise Taxes
Q
o
$5


4


3


2


1
P
61
Supply
Schedule
P Qs
$5 $7 140
$4 $6 120
$3 $5 100
$2 $4 80
$1 $3 60
D
S
40 60 80 100 120 140
Government sets a $2 per
unit tax on Cigarettes
Excise Taxes
Q
o
$5


4


3


2


1
P
62
Supply
Schedule
P Qs
$5 $7 140
$4 $6 120
$3 $5 100
$2 $4 80
$1 $3 60
D
S
40 60 80 100 120 140
Tax is the vertical
distance between
supply curves
S
Tax
Excise Taxes
Q
o
$5


4


3


2


1
P
63
D
S
40 60 80 100 120 140
Identify the
following:
1. Price before tax
2. Price
consumers pay
after tax
3. Price producers
get after tax
4. Total tax
revenue for the
government
before tax
5. Total tax
revenue for the
government
after tax
S
64
1. CS Before Tax
2. PS Before Tax
3. CS After Tax
4. PS After Tax
5. Tax Revenue
for Government
6. Dead Weight
Loss due to tax
7. Amount of tax
revenue
producers pay

Tax Practice
4 Types of Elasticity
1. Elasticity of Demand
2. Elasticity of Supply
3. Cross-Price Elasticity (Subs vs. Comp)
4. Income Elasticity (Norm or Infer)
1. Elasticity of Demand
Elasticity of Demand-
Measurement of consumers
responsiveness to a change in price.
What will happen if price increase? How
much will it effect Quantity Demanded

Who cares?
Used by firms to help determine prices
and sales
Used by the government to decide how to
tax
Inelastic Demand
If price increases, quantity
demanded will fall a little
If price decreases, quantity
demanded increases a little.
In other words, people will
continue to buy it.
20%
5%
INelastic = Insensitive to a
change in price.
Examples:
Gasoline
Milk
Diapers
A INELASTIC demand curve is steep! (looks like an I)
Chewing Gum
Medical Care
Toilet paper
Inelastic Demand
20%
5%
General Characteristics
of INelastic Goods:
Few Substitutes
Necessities
Small portion of
income
Required now, rather
than later
Elasticity coefficient
less than 1

Elastic Demand
If price increases, quantity
demanded will fall a lot
If price decreases, quantity
demanded increases a lot.
In other words, the amount
people buy is sensitive to price.
Elastic = Sensitive to a change
in price.
An ELASTIC demand curve is flat!
Examples:
Soda
Boats
Beef
Real Estate
Pizza
Gold
Elastic Demand
General Characteristics
of Elastic Goods:
Many Substitutes
Luxuries
Large portion of
income
Plenty of time to
decide
Elasticity coefficient
greater than 1
Elastic or Inelastic?






Beef-
Gasoline-
Real Estate-
Medical Care-
Electricity-
Gold-
Elastic- 1.27
INelastic - .20
Elastic- 1.60
INelastic - .31
INelastic - .13
Elastic - 2.6
What about the
demand for insulin for
diabetics?
Perfectly INELASTIC
(Coefficient = 0)
What if % change in
quantity demanded equals
% change in price?
Unit Elastic (Coefficient =1)
45 Degrees
Total Revenue Test
Uses elasticity to show how changes in price will
affect total revenue (TR).
(TR = Price x Quantity)
Elastic Demand-
Price increase causes TR to decrease
Price decrease causes TR to increase
Inelastic Demand-
Price increase causes TR to increase
Price decrease causes TR to decrease
Unit Elastic-
Price changes and TR remains unchanged

Ex: If demand for milk is INelastic, what will happen to
expenditures on milk if price increases?
Is the range between A and B, elastic,
inelastic, or unit elastic?
A
B
10 x 100 =$1000 Total Revenue
5 x 225 =$1125 Total Revenue
Price decreased and TR increased,
so
Demand is ELASTIC
125%
50%
2. Price Elasticity of Supply
Elasticity of Supply-
Elasticity of supply shows how sensitive producers
are to a change in price.
Elasticity of supply is based on time limitations.
Producers need time to produce more.
INelastic = Insensitive to a change in price (Steep curve)
Most goods have INelastic supply in the short-run
Elastic = Sensitive to a change in price (Flat curve)
Most goods have elastic supply in the long-run
Perfectly Inelastic = Q doesnt change (Vertical line)
Set quantity supplied
3. Cross-Price Elasticity of Demand
Cross-Price elasticity shows how sensitive a product
is to a change in price of another good
It shows if two goods are substitutes or compliments


% change in price of product a
% change in quantity of product b
If coefficient is negative (shows inverse relationship)
than the goods are complements
If coefficient is positive (shows direct relationship)
than the goods are substitutes
P increases 20% Q decreases 15%
Income elasticity shows how sensitive a product is to
a change in INCOME
It shows if goods are normal or inferior


% change in income
% change in quantity
If coefficient is negative (shows inverse relationship)
than the good is inferior
If coefficient is positive (shows direct relationship)
than the good is normal

Ex: If income falls 10% and quantity falls 20%
Income increases 20%, and quantity decreases 15%
then the good is a
4. Income-Elasticity of Demand
INFERIOR GOOD
Consumer Choice and
Utility Maximization
77
Calculate Marginal Utility
# of Slices of
Pizza
Total Utility
(in dollars)
Marginal
Utility/Benefit
0 0
1 8
2 14
3 19
4 23
5 25
6 26
7 26
8 24
How many pizzas would you buy if the price
per slice was $2?
78
Calculate Marginal Utility
# of Slices of
Pizza
Total Utility
(in dollars)
Marginal
Utility/Benefit
0 0 0
1 8 8
2 14 6
3 19 5
4 23 4
5 25 2
6 26 1
7 26 0
8 24 -2
How many pizzas would you buy if the price
per slice was $2?
Marginal Cost

$2
$2
$2
$2
$2
$2
$2
$2
$2
79
Calculate Marginal Utility
# of Slices of
Pizza
Total Utility
(in dollars)
Marginal
Utility/Benefit
0 0 0
1 8 8
2 14 6
3 19 5
4 23 4
5 25 2
6 26 1
7 26 0
8 24 -2
How many pizzas would you buy if the price
per slice was $2?
Marginal Cost

2
2
2
2
2
2
2
2
2
You will continue to
consume until
Marginal Benefit =
Marginal Cost
80
If you only have $25, what combination of
movies and go carts maximizes your utility?
Utility Maximization
# Times
Going
Marginal
Utility
(Movies)
MU/P
(Price =$10)
Marginal
Utility
(Go Carts)
MU/P
(Price =$5)
1st 30 10
2nd 20 5
3rd 10 2
4th 5 1
$10 $5
If you only have $25, what combination of
movies and go carts maximizes your utility?
Utility Maximization
# Times
Going
Marginal
Utility
(Movies)
MU/P
(Price =$10)
Marginal
Utility
(Go Carts)
MU/P
(Price =$5)
1st 30 $3 10 $2
2nd 20 $2 5 $1
3rd 10 $1 2 $.40
4th 5 $.50 1 $.20
$10 $5
If you only have $25, what combination of
movies and go carts maximizes your utility?
Utility Maximization
# Times
Going
Marginal
Utility
(Movies)
MU/P
(Price =$10)
Marginal
Utility
(Go Carts)
MU/P
(Price =$5)
1st 30 $3 10 $2
2nd 20 $2 5 $1
3rd 10 $1 2 $.40
4th 5 $.50 1 $.20
$10 $5
If you only have $25, what combination of
movies and go carts maximizes your utility?
Utility Maximization
# Times
Going
Marginal
Utility
(Movies)
MU/P
(Price =$10)
Marginal
Utility
(Go Carts)
MU/P
(Price =$5)
1st 30 $3 10 $2
2nd 20 $2 5 $1
3rd 10 $1 2 $.40
4th 5 $.50 1 $.20
$10 $5
Utility Maximizing Rule
The consumers money should be spent so that the
marginal utility per dollar of each goods equal each
other.
MUx = MUy
85
P
x
P
y
Assume apples cost $1 each and oranges cost $2 each. If the
consumer has $7, identify the combination that maximizes utility.