DEMAND AGAIN

UTILITY  A measure of satisfaction received from possessing or consuming goods and services  Consumers look to maximize utility  Utility is relative to the individual

Util  One unit of satisfaction  A measure of utility

Marginal Utility  The additional utility derived from consuming one more unit of a product or service  formula

Total Utility  A  A measure of the overall satisfaction from possessing or consuming a quantity of some product or service

Disutility DDDDissatisfaction caused from possessing or consuming too much of a product or service OOOOccurs when marginal utility becomes negative

Diminishing Marginal Utility (DMU)  The  The principle that states, the more of a good that one obtains in a specified period of time, the less is the additional utility yielded by an additional unit of that good

Comparing products of an unlike nature  Flat Screen TV  10,000 Marginal Utils  Price $1000  10 Utils per Dollar DDDDiet Pepsi 22220 Marginal Utils PPPPrice $1 22220 Utils per Dollar

Consumer Equilibrium  To maximize their overall utility, consumers must allocate their limited incomes among goods and services in such a way that the marginal utility per dollar, of the last unit of each item purchased, will be as nearly equal as possible  Also called the equimarginal principle  MU/p (last unit a) = MU/p (last unit b) = MU/p (last unit c)…..

Explaining the Law of Demand  DMU  Substitution Effect  Income Effect

Substitution Effect  When a product becomes less expensive, it yields more satisfaction per dollar, therefore consumers will buy more of that product and decrease consumption of other products.

Income Effect  As the price of a product decreases, the associated buying power of a consumers income increases. Therefore, the consumer can buy more of all products.