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Chapter 4 Section 2 Diminishing Marginal Utility

Chapter 4 Section 2 Diminishing Marginal Utility. I’ll buy two pairs of shoes at this price, but I won’t buy three unless it’s cheaper…. DIMINISHING MARGINAL UTILITY. DIMINISHING=LESS MARGINAL =ADDITIONAL UTILITY=USE Each additional unit of a product provides less use than the one before it.

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Chapter 4 Section 2 Diminishing Marginal Utility

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  1. Chapter 4 Section 2Diminishing Marginal Utility

  2. I’ll buy two pairs of shoes at this price, but I won’t buy three unless it’s cheaper…

  3. DIMINISHING MARGINAL UTILITY • DIMINISHING=LESS • MARGINAL =ADDITIONAL • UTILITY=USE • Each additional unit of a product provides less use than the one before it. • This helps explain the downward slope of the demand curve

  4. 4.3 Elasticity of Demand Think Flexible…

  5. Law of Demand • Price and quantity demanded are inversely related. • Price goes up, quantity demanded goes down. (Down by how much less?) • Price goes down, quantity demanded goes up. (Rises how much?)

  6. Demand Elasticity • the extent to which changes in price cause changes in the quantity demanded. • This is important for businesses to know. They want to maximize profits.

  7. Think of an electric company…

  8. INELASTIC DEMAND • Even if their price goes up, we’ll still buy it…we can’t be flexible and wait…

  9. INELASTIC DEMAND-Even a large increase in price won’t decrease quantity demanded by very much.

  10. Total Receipts (Revenue) goes up with inelastic goods! • Total Receipts=Price x quantity sold

  11. Electricity has INELASTIC DEMAND

  12. An inelastic demand curve…

  13. Elastic demand-even a small price change causes a large change in quantity demanded…(people kind of go nuts…)

  14. So, if I have a product with elastic demand…how do I raise revenue?

  15. Airlines have elastic demand.

  16. Even a small change in price will cause a large change in quantity demanded

  17. Decreasing prices just a little will have a large increase in sales

  18. Elastic Demand • Decrease price, increase sales, increase total receipts (revenue)

  19. ELASTIC DEMAND

  20. Demand curve for elastic demand

  21. Unit Elastic-change in price has no effect on total receipts

  22. Demand Elasticity • a relatively small change in price causes a relatively large change in the quantity demanded. A relative large price change will have a relatively small change in the quantity demanded. Elastic Demand Inelastic Demand

  23. REVIEW! • What is diminishing marginal utility? • Give an example • Elasticity of the demand tells us…? • If the price is raised and the total receipts (revenue) fall, the demand for that product is_______ because price and total receipts move in _________ directions?

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