chapter 4 section 2 diminishing marginal utility

Chapter 4 Section 2Diminishing Marginal Utility

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

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

DIMINISHING MARGINAL UTILITY

4.3 Elasticity of Demand

Think Flexible…

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?)

Law of Demand

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.

Demand Elasticity

Think of an electric company…

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

INELASTIC DEMAND

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

Total Receipts=Price x quantity sold

Total Receipts (Revenue) goes up with inelastic goods!

Type of Elasticity

Change in Price

Change in total receipts (Revenue)

Movement of price and total receipts?

INELASTIC SAME

Electricity has INELASTIC DEMAND

An inelastic demand curve…

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

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

Airlines have elastic demand.

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

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

Decrease price, increase sales, increase total receipts (revenue)

Elastic Demand

ELASTIC DEMANDType of Elasticity

Change in Price

Change in total receipts (Revenue)

Movement of price and total receipts?

ELASTIC OPPOSITE

Demand curve for elastic demand

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

Demand Elasticity

Elastic Demand Inelastic Demand

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.

Type of elasticity

Change in Price

Change in total receipts (Revenue)

Movement of price and total receipts?

INELASTIC SAME

ELASTIC OPPOSITE

UNIT ELASTIC Doesn’t matter Won’t change N/A

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?

REVIEW!