ECON107
Principles of
Microeconomics
Week 10
NOVEMBER 2013
Chapter-8
1
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Dr. Mazharul Islam
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Utility and Demand
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Lesson Objectives
 Given
a particular budget, how does a
consumer decide what goods and
services to buy?
 Why does the typical consumer buy
more of a product when its price falls?
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Issues of Discussion
Predictions
of Marginal Utility
Theory
Deriving the Demand Schedule and
Curve.
Consumer Surplus.
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Predictions of Marginal Utility
Theory
A Fall in the Price of a Movie
When the price of a good falls the quantity
demanded of that good increases—the
demand curve slopes downward.
For example, if the price of a movie falls, we
know that MUM/PM rises, so before the consumer
changes the quantities bought, MUM/PM >
MUS/PS.
To restore consumer equilibrium (maximum total
utility) the consumer increases the movies seen
to drive down the MUM and restore MUM/PM =
MUS/PS.
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Dr. Mazharul Islam
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Predictions of Marginal Utility
Theory
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Dr. Mazharul Islam
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Predictions of Marginal Utility
Theory
A Fall in the Price of a Movie
A change in the price of one good changes the
demand for another good.
You’ve seen that if the price of a movie falls,
MUM/PM rises, so before the consumer changes
the quantities consumed, MUM/PM > MUS/PS.
To restore consumer equilibrium (maximum total
utility) the consumer decreases the quantity of
soda consumed to drive up the MUS and restore
MUM/PM = MUS/PS.
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Dr. Mazharul Islam
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Derive Demand Schedule for Movie
From previous table, we found that when the
unit price of movie was $8, Lisa sees 2 movies
and with the new price $4 per movie, she sees
6 movies. So her demand schedule for movies
as follows.
Price per unit
$8
$4
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Quantity demanded
2
6
Dr. Mazharul Islam
Derive Demand
Curve for Movie
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Figure 8.2 illustrates these
predictions.
A fall in the price of a
movie increases the
quantity of movies
demanded—a
movement along the
demand curve for
movies,
and decreases the
demand for soda—a shift
of the demand curve for
soda.
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Dr. Mazharul Islam
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Predictions of Marginal Utility
Theory
Rise in the Price of Soda
Now suppose the price of soda rises.
We know that MUS/PS falls, so before the
consumer changes the quantities bought,
MUS/PS < MUM/PM.
To restore consumer equilibrium (maximum
total utility) the consumer decreases the
quantity of soda consumed to drive up the
MUS and increases the quantity of movies
seen to drive down MUM.
These changes restore MUM/PM = MUS/PS.
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Dr. Mazharul Islam
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Predictions of Marginal Utility
Theory
Rise in the Price of Soda
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Derive Demand Schedule for Soda
From previous table, we found that when the
unit price of Soda was $4, Lisa drunks 4 sodas
and with the new price $8 per soda, she drunks
2 sodas. So her demand schedule for soda as
follows.
Price per unit
$4
$8
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Quantity demanded
4
2
Dr. Mazharul Islam
Derive Demand
Curve for Soda
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Figure 8.3
illustrates these
predictions.
A rise in the price
of soda
decreases the
quantity of soda
demanded—a
movement along
the demand
curve for soda.
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Dr. Mazharul Islam
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Predictions of Marginal Utility
Theory
A Rise in Income
When income increases, the demand for a
normal good increases.
Given the prices of movies and soda, when
Lisa’s income increases from $40 a month to
$56 a month, she buys more movies and
more soda.
Movies and soda are normal goods.
Table 8.6 shows these predictions.
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Predictions of Marginal Utility
Theory
A Rise in Income
Table 8.6 shows Lisa’s
affordable combinations
when she has $56 to spend.
With $40 to spend, Lisa sees
6 movies and drinks
4 cases of soda a month.
With $56 to spend, Lisa
spends the extra $16.
She sees 8 movies and
drinks 6 cases of soda a
month.
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Predictions of Marginal Utility
Theory
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Consumer Surplus
The difference between the maximum
amount that a consumer is willing to pay
for a given quantity of a good and what
the consumer actually pays.
Example: You went into a store and find a
sweater that you like. The price tag on it is $50.
You don't notice another sign saying that
there's a sale on these items and that the
discount is 40%. You decide you value the
sweater $50 and so you went to the sales clerk
to buy it. When she tells you that there's a 40%
discount. So you pay $30. You get at least $20
in consumer surplus.
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Consumer Surplus
Calculate the consumer surplus from this
picture.
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Now it’s over for today. Do you
have any question?
5w/9/2013
Dr. Mazharul Islam