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Consumption and Demand
Utility
• Why do we buy the things we do buy?
• What then is the quality that goods must possess
that makes us want to acquire them?
• The one general term we can apply to all goods
and services is that they provide us with utility
• Can we then measure this utility?
• When an estate agent asks a potential house
buyer, "How much are you prepared to offer for
this house?" the agent is, in effect, asking the
buyer to indicate the value of the utility which
the house has for him or her.
Total and Marginal Utility
• How strongly we want to acquire it?
• Amount of that or a similar good we already possess
• Change in total utility for a good or group of goods
when there is a change in the quantity of those goods
already possessed
• Most of the important decisions relating to the
demand for goods and services are influenced by
valuations of marginal utility compared with the prices
of these goods
• Willingness to buy thus depends on the comparison of
marginal utility with price, and so to some extent it is
reasonable to value utility in terms of price
The Demand Curve
• What is a Demand Curve?
• This example illustrates the general shape of
the demand curve and the normal
relationship between price and quantity
demanded of a product. If all other influences
remain constant, we would expect the
quantity demanded to rise as price falls and to
fall as price rises.
Use and Importance of Demand Curves
• The price-quantity relationship is one of the
most important things we need to know when
considering sales of products.
• A firm must know the likely result of a change
in price, because any alteration in quantity
demanded will affect the total sales revenue.
• Governments also need to know the probable
effects of any change in a tax imposed on
products
Utility, Price and Consumer Surplus
Individual and Market Demand Curves
• The market demand curve for a good or service is the
horizontal summation of all the separate individual demand
curves for the good or service. What this means is that the
quantity demanded at different prices by each person is
combined with the quantity demanded by all the others in the
market, to give the total quantity demanded at each and
every price