Class Summary 11/4/11

Supply and Demand


Rachel's Demand Schedule for Burritos


Price             Quantity of Burritos
$0                               12    (<--not infinite when cost is $0 because there are still costs to consumption)
$0.75                          10
$1.50                          8
$2.25                          6
$3.00                          4
$3.75                          2
$4.50                          0

This chart tells us about: 1) marginal values 2) total expenditures 3) total value & 4) buyers' net gains --> consumer surplus

• Marginal values and total values solve the water-diamond paradox
• Total value = the sum of all burrito consumption
• Marginal value is $3.50 of burritos, but the total value of the burritos is $14.25
• Total expenditures + total value = 4 burritos = $12

There is no correct way to consume something. As price rises, you're going to give up the uses of burritos that are of less value to you. Prices force you to prioritize your wants, and think about the values of everybody else. The demand curve is price related to the number of whatever is consumed. Demand curves are always downward sloping.

Why do we behave in this way?

1. Wealth effects--you're poorer when prices go up, and this causes you to consume less.
2. Substitution availability--your purchasing power is higher when your real income increases, and you're going to look for other things besides just burritos to purchase.
3. Diminishing marginal utility--each unit that you purchase of a good gives you less satisfaction than the previous one. You wouldn't be willing to pay for the next burrito because it brings you less pleasure.