Changes

=== For Honors Students Only: Giffen Goods ===

=== For Honors Students Only: Giffen Goods ===

Last class, we mentioned an odd type of good known as an “inferior” good.  You may recall that the demand for an “inferior” good actually increases when income decreases.  Examples are margarine (because people with declining income can less afford butter).  Bankruptcy services are “inferior”, because when income declines, more people file for bankruptcy, and the greater the demand for bankruptcy services.   

Last class, we mentioned an odd type of good known as an “inferior” good.  You may recall that the demand for an “inferior” good actually increases when income decreases.  Examples are margarine (because people with declining income can less afford butter).  Bankruptcy services are “inferior”, because when people's income declines, more of them file for bankruptcy, and then there is a greater demand for bankruptcy services.   

'''''Question''''': If a good is inferior, does a decrease in its price cause an increase in quantity demanded?

'''''Question''''': If a good is inferior, does a decrease in its price cause an increase in quantity demanded?

Finally, at 4 o'clock in the afternoon, you see the golden arches of McDonalds appear on the horizon.  You drive closer and the arches appear bigger.  It’s not a mirage!

Finally, at 4 o'clock in the afternoon, you see the golden arches of McDonalds appear on the horizon.  You drive closer and the arches appear bigger.  It’s not a mirage!

When you arrive, you run in and order its famous french fries.  You’re famished.  When the food arrives, you take your first handful of french fries.  Wow, it is really satisfying to to eat that first bunch of french fries with an empty stomach.  Your marginal utility is extremely high.  You might have even been willing to pay $5 for that first mouthful of french fries because you are so hungry.  Then you eat your second handful of french fries.  Your marginal utility is still high, but not quite as high as the first one.  You wouldn’t have paid as much for the second handful either.  By the time you finish all the french fries, the last few bites were not so satisfying.  In fact, you’ve gotten sick to your stomach.  The marginal utility of that last french fry was very low.  Perhaps even less than zero!

When you arrive, you run in and order its famous french fries.  You’re famished.  When the food arrives, you take your first handful of french fries.  Wow, it is really satisfying to eat that first bunch of french fries with an empty stomach.  Your marginal utility is extremely high.  You might have even been willing to pay $5 for that first mouthful of french fries because you are so hungry.  Then you eat your second handful of french fries.  Your marginal utility is still high, but not quite as high as the first one.  You wouldn’t have paid as much for the second handful either.  By the time you finish all the french fries, the last few bites were not so satisfying.  In fact, you’ve gotten sick to your stomach.  The marginal utility of that last french fry was very low.  Perhaps even less than zero!

You have just experienced the '''''Law of Diminishing Marginal Utility''''': the marginal utility of each additional unit (e.g., french fry) always declines (in a given period).  This is similar to the "Diminishing Returns" experienced by a '''''producer''''' of goods.

You have just experienced the '''''Law of Diminishing Marginal Utility''''': the marginal utility of each additional unit (e.g., french fry) always declines (in a given period).  This is similar to the "Diminishing Returns" experienced by a '''''producer''''' of goods.

Let's take a simple example.  Suppose you like chocolate and peanut butter equally well, and you are "indifferent" between receiving one chocolate bar and one peanut butter candy bar.  Plotting the good for a chocolate bar on the x-axis and the good for a peanut butter candy bar on the y-axis, the indifference curve will be a straight line with a negative slope of 1.  Give up a chocolate bar but receive a peanut butter bar, and you're on the same indifference curve:  your overall utility has not changed.  But give up a chocolate bar and receive TWO peanut butter bars, and you've increased your overall utility and you've left that original indifference curve.  You're better off with that deal and are not "indifferent" to it.  You want the improvement in utility in the 2-for-1 deal.

Let's take a simple example.  Suppose you like chocolate and peanut butter equally well, and you are "indifferent" between receiving one chocolate bar and one peanut butter candy bar.  Plotting the good for a chocolate bar on the x-axis and the good for a peanut butter candy bar on the y-axis, the indifference curve will be a straight line with a negative slope of 1.  Give up a chocolate bar but receive a peanut butter bar, and you're on the same indifference curve:  your overall utility has not changed.  But give up a chocolate bar and receive TWO peanut butter bars, and you've increased your overall utility and you've left that original indifference curve.  You're better off with that deal and are not "indifferent" to it.  You want the improvement in utility in the 2-for-1 deal.

Let’s take another example that illustrates the usefulness of an indifference curve.  Suppose you are working on the homework for this course with three friends - Chris, Stephanie and Kevin.  Someone says they are hungry and go to look for snacks.  You see a half-eaten bag of potato chips and you pop a bag of popcorn.  However, there is not enough food for everyone, so have to ration who receives what.

Let’s take another example that illustrates the usefulness of an indifference curve.  Suppose you are working on the homework for this course with three friends - Chris, Stephanie and Kevin.  Someone says they are hungry and go to look for snacks.  You see a half-eaten bag of potato chips and you pop a bag of popcorn.  However, there is not enough food for everyone, so you have to ration who receives what.

You count 24 potato chips and 40 kernels of popcorn.  Uh oh.  There are four of you.  On average, that’s only 6 potato chips and 10 kernels of popcorn per person.  You tell everyone that.

You count 24 potato chips and 40 kernels of popcorn.  Uh oh.  There are four of you.  On average, that’s only 6 potato chips and 10 kernels of popcorn per person.  You tell everyone that.

“Consumer surplus” is a concept that illustrates the power of the free market as it drives down the price of goods.  When we buy goods and services, most of us would pay at a higher price if we had to.  For example, our families would pay twice the cost of milk because we would still want to drink milk even if the price were higher.  We may not buy as much milk at a higher price, but we would still buy some.  We get extra value when we can buy milk at a price lower than what we would really pay if we had to.

“Consumer surplus” is a concept that illustrates the power of the free market as it drives down the price of goods.  When we buy goods and services, most of us would pay at a higher price if we had to.  For example, our families would pay twice the cost of milk because we would still want to drink milk even if the price were higher.  We may not buy as much milk at a higher price, but we would still buy some.  We get extra value when we can buy milk at a price lower than what we would really pay if we had to.

The "consumer surplus" is the net benefit (in dollars) a consumer obtains from buying a good.  Thus (consumer surplus) = (total benefit) - (total cost).  The "consumer surplus" is never negative, because people would not purchase goods or services if their total benefit is less than their total cost.  They would be better off keeping their money and not making the purchase.

The "consumer surplus" is the net benefit (in dollars) that a consumer obtains from buying a good.  Thus (consumer surplus) = (total benefit) - (total cost).  The "consumer surplus" is never negative, because people would not purchase goods or services if their total benefit is less than their total cost.  They would be better off keeping their money and not making the purchase.

To illustrate how powerful the concept of the "consumer surplus" is, let’s define another term: “demand price.”  That is the most someone is willing to pay for something.  When you go to see a movie, there is a maximum amount you are willing to pay for a ticket.  It varies for different consumers.  It also depends on what the movie is.

To illustrate how powerful the concept of the "consumer surplus" is, let’s define another term: “demand price.”  That is the most someone is willing to pay for something.  When you go to see a movie, there is a maximum amount you are willing to pay for a ticket.  It varies for different consumers.  It also depends on what the movie is.

The consumer surplus is the demand price (the most a consumer would pay) minus the price paid (the amount the consumer actually has to pay).  Suppose you were effusive (i.e., very enthusiastic) about a particular movie, and wanted very much to see it.  You were so excited that you were willing to pay $20 to see that movie.  But if the theater charges you only $8, then your consumer surplus is $20 - $8 = $12.

The consumer surplus is the demand price (the most a consumer would pay) minus the price paid (the amount the consumer actually has to pay).  Suppose you were effusive (i.e., very enthusiastic) about a particular movie, and wanted very much to see it.  You were so excited that you were willing to pay $20 to see that movie.  But if the theater charges you only $8, then your consumer surplus is $20 - $8 = $12.

Consumers stop buying a good when the demand price falls slightly below the price paid.  For movies, the demand price falls the longer it keeps playing in a theater.  After you’ve seen the movie once or twice, you’re not willing to pay so much to see it again.  Over time people stop paying to see the same movie, and the theater stops playing it and begins showing a new movie instead.

Consumers stop buying a good when the demand price falls slightly below the sales price.  For movies, the demand price falls the longer it keeps playing in a theater.  After you’ve seen the movie once or twice, you’re not willing to pay so much to see it again.  Over time people stop paying to see the same movie, and the theater stops playing it and begins showing a new movie instead.

Almost every time someone buys something, he benefits from the consumer surplus of that transaction because he would probably pay a little more than he did.  If you value a chocolate candy bar at $1.05 but can buy it for $1, then you acquired extra wealth of 5 cents as your consumer surplus.  You would have paid $1.05 for it, but paid only $1 and then had both the candy bar and the 5 cents.  You became wealthier from the transaction by an amount equal to your consumer surplus.  And you became fatter too!

Almost every time someone buys something, he benefits from the consumer surplus of that transaction because he would probably pay a little more than he did.  If you value a chocolate candy bar at $1.05 but can buy it for $1, then you acquired extra wealth of 5 cents as your consumer surplus.  You would have paid $1.05 for it, but paid only $1 and then had both the candy bar and the extra 5 cents.  You became wealthier from the transaction by an amount equal to your consumer surplus.  And you became fatter too!

==Charity==

==Charity==