Session 3
In summer vacation, two college student travelled from Shanghai to Hangzhou by bicycle.
It was 39C, No water left. Need to buy a glass of water
Two Yuan is still expensive, but the 2 students were satisfied. Why ?
Shanghai
Hangzhou
Roadside
Farmer’s store
Everyday Economics
Glass of water Asked price of The farmer Price willing to pay Trade price
1st
2nd
3rd Refuse to buy at
● Economic Objectives of the Consumer(p40)
◆ The basic economic problem is the satisfaction of
consumer wants.
◆ The degree of satisfaction of consumption of
goods & services is measured through Utility (效益)
◆ As we increase our consumption of a good, the total
satisfaction (utility) gained will rise, but at a decreasing
rate.
Example:
When you eat the 1st chocolate, you feel really great !
The 2nd, The 3rd chocolate, great too.
The 4th, . . . The level of satisfaction will ↓
You eat more and more, finally you will feel sick from
eating too many chocolate.
● Utility and Marginal utility (效益及边际效益) , p40
◆ Utility = the degree of satisfaction of a good or
service
◆ To a certain degree, the more you consume,
the more satisfaction (utility) you will achieve
◆ Marginal utility (边际效益) of a good or service
is the utility gained from an increase in the
consumption of that good or service
Definition:
Marginal utility = [increase in utility] /
[Increase in consumption]
◆ Example of Marginal Utility (Activity 5, p42)
On an extremely hot day, you stop at a small café for a drink of juice. The following table displays the gains from consuming glasses of juice.
Utility = the degree of
satisfaction
Marginal utility =
increase in utility
divided by
Increase in consumption
Quantity
# of glasses of juice Total
Utility Marginal
Utility
0 0
1 12 12
2 20 8
3 26 6
4 30 4
5 32 2
6 32 0
7 30 -2
◆ Curves of Utility & Marginal Utility
Quanti
ty Total
Utility Marginal
Utility
1 12 12
2 20 8
3 26 6
4 30 4
5 32 2
6 32 0
7 30 -2
◆ Marginal utility & price are directly proportional (p44)
Marginal Utility ∝ Price
Price ↑ (∵Consume ↓), Marginal Utility ↑
Price ↓ (∵Consume ↑), Marginal Utility ↓
● Consumer preference (消费嗜好,消费偏好)
When travel too many times to the cinema, the Marginal Utility (MU) for it will drop. You consider other options – say, go to the theatre, why ? because
1. If MU for the cinema < MU for the theatre.
Consumer shifts consumption from cinema to theatre
Total Utility from cinema ↓, Total utility from theatre ↑
MU for the cinema ↑, MU for the theatre ↓
Continue shifting, . . . . . . . .
MU for the cinema = MU for the theatre.
Reaching Consumer equilibrium (达到消费均衡)
A trip to
The cinema
A trip to
The theatre
2. If MU for the cinema > MU for the theatre.
Consumer shifts consumption from theatre to cinema
Total Utility from cinema ↑, Total utility from theatre ↓
MU for the cinema ↓, MU for the theatre ↑
Continue shifting, . . . . . . . .
MU for the cinema = MU for the theatre.
Reaching Consumer equilibrium (达到消费均衡)
A trip to
The cinema
A trip to
The theatre
● Summary of Consumer preference (消费嗜好总结）
◆ Utility = the degree of satisfaction of a good or
service
◆ Marginal utility is the gain of utility by an additional
consumption of a good or service
◆ Consumption ↑ MU ↓ though Total U ↑
◆ Consumer equilibrium (消费均衡)
If MU for good A ≠ MU for good B,
Shifting consumption, . . . . . .
MU for Good A = MU for Good B
Reaching Consumer equilibrium (达到消费均衡)
● Indifference analysis 无差异分析
◆ Consumers shifts consumption to obtain maximum
satisfaction (utility).
◆ We can show all possible combinations of the
consumption of two goods with the same level of utility.
Example:
Combination Of consumption of two goods # of trips to
Cinema # of trips to
Theatre
A 10 2
B 8 3
C 6 4
D 4 5
● The indifference
Curve
(满意度无差异曲线)
Theatre
Cinema
Combination Cinema Theatre
A 10 2
B 8 3
C 6 4
D 4 5
● The budget line
It illustrates all the possible combinations of two goods that can be purchased at given prices and for a given consumer budget.
PA = Price of Good A
NA = # of Units of Good A purchased
PB = Price of Good B
NB = # of Units of Good A purchased
For example, Budget = ＄600
PA NA + PB NB = 600 (1) →
NB = 1000 / PB - ( PA / PB ) NA (2)
Equation (1) is a linear equation with respect to the two variables NB and NA →
∴The budget line is a straight line
A budget line illustrates all the possible combinations of two goods that can be purchased at given prices and for a given consumer budget
Theatre
Cinema
● Discussion (p46)
▲ Same consumer satisfaction along IC, points A,B,C,D
▲ The budget line is a tangent to the IC curve at point C
▲ C gives the maximum satisfaction within the budget.
A
B
C
D
Theatre
Cinema
● Factors affecting consumer Equilibrium (p47)
1. Substitution effect (替代效果) of price change
if price of cinema tickets falls, we buy more cinema tickets, and less theatre tickets. We move along the IC curve from B to A
B
A
(Book, p47, ?)
Cinema
Theatre
2. Income effect (收入效果)
As income increases, we consume more and the indifference curve will move out (外移）. Otherwise, move inwards （内移）.
Higher income
Theatre
Cinema
Summary of
Basic economics problems :
Scarcity
Opportunity costs
Production-possibility
Consumers behavior
Economic
systems
Economics
Free Market System
Planned System
Mixed System
Resource
Ownership
Choices
Who makes
decisions
● Total Revenue (TR) approach to determine
elasticity (derivation) (Skip this slide), p113
TR = P Q (Price × Quantity demanded)
TR = P Q,
ΔTR = (P + ΔP) (Q + ΔQ) – PQ = (ΔP) Q + P (ΔQ) + ΔP ΔQ
ΔTR ≈ (ΔP) Q + P (ΔQ) = (ΔP) Q [1 – (-ΔQ/Q) / (ΔP /P) ]
= (ΔP) Q [ 1 – ED ]
ΔTR /ΔP ≈ Q [ 1 – ED ]
1. Elastic Demand (富有弹性的需求) (ED >1):
Δ TR / Δ P < 0 P , TR or P , TR
2. Inelastic Demand (缺乏弹性的需求) (ED<1):
Δ TR / Δ P > 0 P , TR or P ,TR
3. Unitary Elastic Demand (单位弹性需求) (ED=1):
Δ TR / Δ P > 0 TR=Constant (不变)
● Using Total Revenue (TR)（总收入） to calculate Price Elasticity of Demand p113
TR = P Q (Price × Quantity demanded)
1. If TR and P change in the opposite direction, it
is an Elastic demand (富有弹性的需求)
. P , TR or P , TR
2. If TR and P change in the same direction, it is an
Inelastic demand (缺乏弹性的需求)
. P , TR or P , TR
3. If TR does not change with price, it is Unitary
elastic demand (单位弹性需求) P , Same TR or
P , Same TR
Example of Total Revenue method to analyse elasticity
Elastic at high price level , inelastic at low price level
2. Inelastic, ED=5%/10%=
P= → P= ,
P=$, Q=200, TR=$200
P=$, Q=210, TR=$189
P↓TR↓ (Same, Inelastic)
1. Elastic, ED= 10% / 5% = 2
P= → P= ,
P=$, Q=100, TR= $200
P=$, Q=110, TR= $209
P↓TR↑(Opposite, Elastic)
ED =|ΔQ / Q | / |ΔP / P |
= |ΔQ / ΔP | / | Q / P |
Same |ΔQ / ΔP |
Different | Q / P |
