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Decision Equation

opportunity benefit – opportunity cost net utility. Decision Equation. satisfaction. regret. net utility. The buyer determines the value of an item!. Economic Principles. subjective value = worth determined by the buyer

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Decision Equation

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  1. opportunity benefit – opportunity cost net utility Decision Equation satisfaction regret net utility

  2. The buyer determines the value of an item!

  3. Economic Principles • subjective value =worth determined by the buyer • diminishing marginal utility =receiving less additional satisfaction as more is obtained during specific time period

  4. Diminishing Marginal Utility • “receive less and less” = diminishing • “additional” = marginal • “satisfaction” = utility • “specific period of time” = time limit

  5. 15 12 9 6 3 1 2 3 4 5 6 7 8 9 10 total satisfaction marginal utility # of candy bars 0

  6. price tag personal value personal value price tag personal value price tag Function of Prices

  7. Prices • transmit information • provide incentives • redistribute income

  8. Gasoline Sales Components • crude oil suppliers • refiners • distribution and marketing (stations) • consumers

  9. consumers demand more stations buy larger quantities refiners increase production suppliers increase output

  10. Where do prices come from?

  11. value= determined by buyer price= determined by buyer & seller • supply and demand

  12. demand act of buying

  13. Law of Demand All else being constant, the lower the price charged for a good or service, the greater the quantity people will demand and vice versa.

  14. Fred Jonna Josh Robert Sarah Ashleigh Bethany ACTUAL PRICE .82 .72 .58 .43 1.15 .68 .61 .70

  15. Fred Jonna Josh Robert Sarah Ashleigh Bethany ACTUAL PRICE .82 .72 .58 .43 1.15 .68 .61 .60

  16. demand schedules table listings of various quantities demanded at various prices

  17. demand curve line-graph of demand schedule information

  18. 1.30 1.20 price per bar 1.10 1.00 Demand Curve .90 .80 .70 .60 quantity .50 4000 5000 2000 8000 1000 3000 6000 7000

  19. inelastic demand quantity is less responsive to the price

  20. $60 $55 price per unit $50 Vertical Curve $45 $40 $35 $30 $25 quantity $20 2750 3000 1250 3750 1000 2500 3250 3500

  21. elastic demand quantity increases while the price remains the same

  22. $50 $45 price per unit $40 Horizontal Curve $35 $30 $25 $20 $15 quantity $10 4 5 2 8 1 3 6 7

  23. Giffen Goods quantity increases as the price increases

  24. $90 $80 price per unit $70 $60 Giffen Curve $50 $40 $30 $20 quantity $10 400 500 200 700 300 100 600

  25. Review negatively sloping curves • normal demand curve • quantity increases as price decreases

  26. Review positively sloping curves • Giffen goods (“snob appeal”) • quantity increases as price increases

  27. Review vertical curve • inelastic demand • quantity remains the same even if price increases

  28. Review horizontal curve • elastic demand • price remains the same even if quantity increases

  29. change in quantity demanded a change in price causes a change in numbers demanded

  30. 1.30 1.20 1.20 Change in Quantity Demanded price per bar 1.10 1.00 .90 .80 .70 .70 .60 quantity .50 4000 5000 2000 8000 1000 3000 6000 7000

  31. increase in demand demanding more at every price

  32. 1.30 1.20 1.10 1.00 Increase in Demand .90 .80 .70 .60 .50 4000 5000 2000 8000 1000 3000 6000 7000

  33. decrease in demand demanding less at every price

  34. 1.30 1.20 1.10 1.00 Decrease in Demand .90 .80 .70 .60 .50 4000 5000 2000 8000 1000 3000 6000 7000

  35. Review change in quantity demanded change in demand • caused by a price change • caused by a demand change • moves along the same curve • shifts the whole curve

  36. Change in Demand Factors • change in people’s income • change in price of related goods • change in people’s tastes and preferences • change in people’s expectations

  37. $50 $45 $40 $35 $30 $25 $20 $15 $10 4 5 2 1 3 6

  38. normal good demand increases because buyer’s income increases

  39. inferior goods • demand decreases because buyer’s income increases • demand increases because buyer’s income decreases

  40. substitute goods goods that may be used in place of others

  41. Substitute Goods P2 P1 Q2 Q2 Q1

  42. complementary goods goods usually purchased together

  43. 5.70 5.10 Complementary Goods 4.50 3.90 2.70 2.10 1.50 .90 .30 Q2 Q1

  44. fad items goods and services that appear quickly on the scene, are advertised heavily, and are sold in great quantities over a short period of time

  45. Expectations • demand shifts due to anticipation of dramatic rise or fall of the price of a good • influenced by: ~price changes ~advertisements ~weather changes

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