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!

Principles of Microeconomics, 2nd Canadian EditionSlide 1-4Copyright © 2005 McGraw-Hill Ryerson Limited FIGURE 4.2 Lamar ’ s Total Utility from Ice Cream Consumption

Principles of Microeconomics, 2nd Canadian EditionSlide 1-5Copyright © 2005 McGraw-Hill Ryerson Limited TABLE 4.2 Total and Marginal Utility from Ice Cream Consumption

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

Principles of Microeconomics, 2nd Canadian EditionSlide 1-11Copyright © 2005 McGraw-Hill Ryerson Limited FIGURE 3.7 An Increase in the Quantity Demanded versus an Increase in Demand 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. Increase in quantity demanded Increase in demand D′

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 A rise in the price of one (e.g. butter) may increase the demand for the substitute ( margarine) This is a direct relationship Complementary Goods An increase in the 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 ShiftPrice (Eqm)Quantity d (Eqm) LeftDecreases RightIncreases

Principles of Microeconomics, 2nd Canadian EditionSlide 1-22Copyright © 2005 McGraw-Hill Ryerson Limited The Effect on the Market for Tennis Balls of a Decline in Court Rental Fees When the price of a good’s complement falls, demand for the good shifts right, causing equilibrium price and quantity to rise. FIGURE 3.11 S D′ D

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 ShiftPrice (Eqm)Quantity s (Eqm) LeftIncreasesDecreases RightDecreasesIncreases

Principles of Microeconomics, 2nd Canadian EditionSlide 1-28Copyright © 2005 McGraw-Hill Ryerson Limited FIGURE 3.# The Effect on the Skateboard Market of an Increase in the Price of Fiberglass S S′ D

Principles of Microeconomics, 2nd Canadian EditionSlide 1-29Copyright © 2005 McGraw-Hill Ryerson Limited The Effect on the Market for New Houses of a Decline in Carpenters’ Wage Rates When input prices fall, supply shift right, causing equilibrium price to fall and equilibrium quantity to rise. FIGURE 3.8 S D S′

Principles of Microeconomics, 2nd Canadian EditionSlide 1-30Copyright © 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. A decrease in demand will lead to a decrease in both equilibrium price and quantity. An increase in supply will lead to a decrease in the equilibrium price and an increase in the equilibrium quantity. A decrease in supply will lead to an increase in the equilibrium price and a decrease in the equilibrium quantity.

Principles of Microeconomics, 2nd Canadian EditionSlide 1-31Copyright © 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 EditionSlide 1-32Copyright © 2005 McGraw-Hill Ryerson Limited FIGURE 3.16 The Effects of Simultaneous Shifts in Supply and Demand When demand shifts left and supply shifts right, equilibrium price falls, but equilibrium quantity may either rise [panel (b)] or fall [panel (a)]. S S′ D D′ S S′ D D′ Q′Q Q P′ P P

Practice Questions  Do several practice questions.  Shifts with Supply & Demand  ….then Assignment!