How much coffee can you
drink ?
 One cup, two, three,
four ?
 How does Dunkin
Donuts get you to buy
more coffee after lunch
?
They offer you a deal…buy a large
coffee, get a free muffin or donut
Dunkin Donuts knows ALL about the
Principle of Diminishing Marginal
Utility !!!
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!
FIGURE 4.2
Lamar’s Total Utility from Ice Cream Consumption
Principles of Microeconomics, 2nd Canadian Edition
Slide 1-4
Copyright © 2005 McGraw-Hill Ryerson Limited
TABLE 4.2
Total and Marginal Utility from Ice Cream Consumption
Principles of Microeconomics, 2nd Canadian Edition
Slide 1-5
Copyright © 2005 McGraw-Hill Ryerson Limited
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
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.
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.
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
Shifts in the Demand Curve
FIGURE 3.7
An Increase in the Quantity Demanded versus an Increase in Demand
Increase in
quantity demanded
Increase in
demand
D′
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.
Principles of Microeconomics, 2nd Canadian Edition
Slide 1-11
Copyright © 2005 McGraw-Hill Ryerson Limited
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
consumer’s preference towards a particular good or service.
Think – Pair - Share
 Brainstorm ideas of what you think may be a factor
that shifts the demand curve…
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)
2. Price of Related Goods
 Substitute Goods
 Complementary Goods
 A rise in the price of one
 An increase in the
(e.g. butter) may increase
the demand for the
substitute ( margarine)
 This is a direct
relationship
price of one good ( e.g
cameras) will decrease
the demand for the
complementary good
(film/memory cards).
 This is an inverse
relationship
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)
4. Expectations
 If the price of gas
is expected to
increase the next
day, the current
demand for gas
will increase.
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
6. Seasonality
 More lemonade
will be demanded
 More bathing
suits will be
demanded
 More sun tan
lotion will be
demanded
7. Trends & Advertising
 Advertising creates
trends
 Gap



Everybody in vests!
Everybody in leather
Everybody in stripes
 Some advertising can
decrease demand

SUV = Terrorism
Demand Shifts create a
New Equilibrium
Type of Shift
Price (Eqm)
Quantityd (Eqm)
Left
Decreases
Decreases
Right
Increases
Increases
FIGURE 3.11
The Effect on the Market for Tennis Balls of a Decline in Court Rental Fees
S
1.40
1.00
D′
D
40
58
When the price of a good’s complement falls, demand for the good shifts right, causing equilibrium
price and quantity to rise.
Principles of Microeconomics, 2nd Canadian Edition
Slide 1-22
Copyright © 2005 McGraw-Hill Ryerson Limited
Shifts in the Supply Curve
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.
Think – Pair - Share
 Brainstorm ideas of what you think may be a factor
that shifts the supply curve…
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 (Gov’t grants)
 Related Goods ( e.g corn, wheat)
 Expectations
 Number of Sellers in the Market
Supply Shifts create a New
Equilibrium
Type of Shift
Price (Eqm)
Quantitys (Eqm)
Left
Increases
Decreases
Right
Decreases
Increases
FIGURE 3.#
The Effect on the Skateboard Market of an Increase in the Price of Fiberglass
S′
S
80
60
D
800 1000
Principles of Microeconomics, 2nd Canadian Edition
Slide 1-28
Copyright © 2005 McGraw-Hill Ryerson Limited
FIGURE 3.8
The Effect on the Market for New Houses of a Decline in Carpenters’ Wage Rates
S
S′
160
150
D
40
50
When input prices fall, supply shift right, causing equilibrium price to fall and equilibrium quantity to rise.
Principles of Microeconomics, 2nd Canadian Edition
Slide 1-29
Copyright © 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.
An increase in supply
will lead to a
decrease in the
equilibrium price and
an increase in the
equilibrium quantity.
Principles of Microeconomics, 2nd Canadian Edition
Slide 1-30
A decrease in
demand will lead to a
decrease in both
equilibrium price and
quantity.
A decrease in supply
will lead to an
increase in the
equilibrium price and
a decrease in the
equilibrium quantity.
Copyright © 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
Principles of Microeconomics, 2nd Canadian Edition
Slide 1-31
Copyright © 2005 McGraw-Hill Ryerson Limited
FIGURE 3.16
The Effects of Simultaneous Shifts in Supply and Demand
S
S′
S
S′
P
P
P′
P′
D
D
D′
D′
Q′
Q
Q
Q′
When demand shifts left and supply shifts right, equilibrium price falls, but equilibrium quantity may
either rise [panel (b)] or fall [panel (a)].
Principles of Microeconomics, 2nd Canadian Edition
Slide 1-32
Copyright © 2005 McGraw-Hill Ryerson Limited
Practice Questions
 Do several practice questions.
 Shifts with Supply & Demand
 ….then Assignment!