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The Price System and Theory Of Firm

The Price System and Theory Of Firm. Background to Demand. Marginal Utility Theory. Students are able to: Explain how consumer maximize satisfaction Show how to derive demand curve from marginal utility theory. MARGINAL UTILITY THEORY.

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The Price System and Theory Of Firm

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  1. The Price System and Theory Of Firm

  2. Background to Demand Marginal Utility Theory

  3. Students are able to: • Explain how consumer maximize satisfaction • Show how to derive demand curve from marginal utility theory

  4. MARGINAL UTILITY THEORY • Utility means satisfaction derived from consuming units of good consumed in a given period of time. • Marginal utilityIs the additional satisfaction or utility gained from consuming an extra unit of a good within a given time period.

  5. Darren’s utility from consuming crisps (daily) Packets of crisps TU in utils 0 1 2 3 4 5 6 0 7 11 13 14 14 13 Utility (utils) Packets of crisps consumed (per day)

  6. Darren’s utility from consuming crisps (daily) TU Packets of crisps TU in utils 0 1 2 3 4 5 6 0 7 11 13 14 14 13 Utility (utils) Packets of crisps consumed (per day)

  7. Darren’s utility from consuming crisps (daily) TU MU in utils Packets of crisps TU in utils - 7 4 2 1 0 -1 0 1 2 3 4 5 6 0 7 11 13 14 14 13 Utility (utils) Packets of crisps consumed (per day)

  8. Darren’s utility from consuming crisps (daily) TU MU in utils Packets of crisps TU in utils - 7 4 2 1 0 -1 0 1 2 3 4 5 6 0 7 11 13 14 14 13 Utility (utils) MU Packets of crisps consumed (per day)

  9. Darren’s utility from consuming crisps (daily) DTU = 2 DQ = 1 MU = DTU / DQ TU Utility (utils) MU Packets of crisps consumed (per day)

  10. Darren’s utility from consuming crisps (daily) TU DTU = 2 DQ = 1 Utility (utils) MU = DTU / DQ = 2/1 = 2 MU Packets of crisps consumed (per day)

  11. Equimarginal Principle • At equilibrium, consumer maximize his satisfaction. Consumer equilibrium is achieved when the marginal utility he gets from the last dollar spent of his expenditure of the different goods consumed is equal. • MUx / Px=MUy / Py;

  12. In order to maximize utility, consumer needs to purchase 2X and 7Y.

  13. The optimum level of consumption: the one-commodity version • The amount a consumer is willing to spent on a good depends on desire for it which in turn depends on the marginal utility derived from it. The higher the marginal utility, the more desirable the good and the higher the price one is willing to pay. • As consumption increases, less and less satisfaction is derived and therefore only lower prices can induce greater consumption.

  14. Deriving an individual person’s demand curve Consumption at Q1 where P1 = MU a P1 Q1 MU, P MU = D O Q

  15. Deriving an individual person’s demand curve Consumption at Q2 where P2 = MU b P2 Q2 MU, P a P1 MU = D O Q1 Q

  16. Deriving an individual person’s demand curve Consumption at Q3 where P3 = MU c P3 Q3 MU, P a P1 b P2 MU = D O Q1 Q2 Q

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