Marginal Utility, Market Demand Curve, Calculating Equilibrium Price and Quantity

This article explains the concepts of Marginal Utility, Market Demand Curve, and Calculating Equilibrium Price and Quantity with solved examples. It also covers the concept of Elasticity of Demand and its application in real life. The article provides study material, solved assignments, essays, dissertations, and more at Desklib.

Members
Amrina Rahman
Mushfiq Ahmed Prantik
Kanij Fatema Chaity
Noshin Rahman
Ramisa Tasfiah

-George Bernard Shaw
Topics:
Marginal Utility
Market Demand Curve
Calculating Equilibrium Price and Quantity

Consider the following table showing the utility of diffe
numbers of days skied each year:
Number of days skied Total utility ($)
0 0
1 70
2 110
3 146
4 176
5 196
6 196
Construct a table showing the marginal utility for eachdayof skiing. Assuming that there are 1
people with preferences shown in the table, draw the market demand curve for sk
cost $40 per day, what are equilibrium price and quantity of days skied?

What is ??
is the satisfaction received from consuming a good or service
is the additional utility from the consumption of
additional unit of a commodity
Marginal Utility = Change in Total Utility/ Change in Units
Total utility of a commodity increases adding the MU but at a dec

Analyzing the given table
0 0 0
1 70 70-0=70
2 110 110-70=40
3 146 146-110=36
4 176 176-146=30
5 196 196-176=20
6 196 196-196=0
Fig: MU for each day of skiing
For example,
Total Utility (Day 1) = 70
Total Utility (Day 2) = 110
So, 2ndday’s MU= 110-70=40
➢ Total utility is theof the marginal utility up to that point
➢ Ordinal measures are needed instead of cardinal numbe

Market Demand Curve
✓ Demand of all consumers of a good or service at a given price
✓ Market demand curve is the at each price

Assuming that there are 1 million people with preferences shown
0
70
40
36
30
20
00
10
20
30
40
50
60
70
80
Day 0 Day1 Day 2 Day 3 Day 4 Day 5 Day 6
Market Demand
Fig: Market Demand Curve
In the graph, with the decrease of marginal utility (price), numb
(quantity demanded) are increasing.
marginal utility ($) [price]
no. of days skied [quantity demanded]

Equilibrium Price and Quantity
✓ Market equilibrium comes at the of supply and demand curves
✓ No shortages or surpluses are occurred at this point
✓ Increase in demand (holding other things constant) will cause the equilibrium p
increase, opposite situation lowers the price
Surpluses ( than equilibrium)
Shortages ( than equilibrium)
Equilibrium

If lift tickets cost $40 per day, equilibrium price and quantity are -
0
70
40
36
30
20
00
40 40 40 40 40 40
0
10
20
30
40
50
60
70
80
Day 0 Day1 Day 2 Day 3 Day 4 Day 5 Day 6
Equilibrium Price and Quantity
Market Demand (Demand
Curve)
Ticket Cost (Supply Curve)
no. of days skied [quantity demanded]
The blue curve indicates dem
curve while the orange one
indicates supply curve. As sta
before, the intersecting point
40) determines the equilibriu
price and quantity. At the pri
$40 and quantity of 2, both t
supplier and consumer agree
reach the point.
marginal utility ($) [price]
Fig: Calculating Equilibrium Price and Quantity from Graph

For each of the commodities in Table 5-2, calculate the impact of
price on quantity demanded. Similarly, for the goods in Table 5-3,
the impact of a 50 percent increase in consumer incomes?

What Is Of Demand?

Tomatoes 4.6 4.6
Green peas 2.8 2.8
Legal Gambling 1.9 1.9
Taxi Service 1.24 1.24
Furniture 1 1
Movies 0.87 0.87
Shoes 0.7 0.7
Legal Services 0.61 0.61
Medical Insurance 0.31 0.31
Bus Travel 0.2 0.2
Residential Electricity 0.13 0.13
❑ When a 1 percent change in
price calls forth more than a 1
percent change in quantity
demanded, the good has
demand
❑ When a 1 percent change in
price produces less than a 1
percent change in quantity
demanded, the good has
demand

What Is Of Demand?
Elasticity

Automobiles 2.46 1.23
Owner-Occupied housing 1.49 0.745
Furniture 1.48 0.74
Books 1.44 0.72
Restaurant meals 1.4 0.7
Clothing 1.02 0.51
Physicians services 0.75 0.375
Tobacco 0.64 0.32
Eggs 0.37 0.185
Margarine -0.2 -0.1
Pig products -0.2 -0.1
Flour -0.36 -0.18

(5,30)
(15,10)
(10,20)
P
0 Q

(5,30)
(15,10)
(10,20)
P
0 Q

An interesting application of supply and demand to addictive
substances compares alternative techniques for supply
restriction. For this problem, assume that the demand for
addictive substances is inelastic.
a. One approach (used today for heroin and cocaine and for
alcohol during Prohibition) is to reduce supply at the nation’s
borders. Show how this raises price and increases the total
income of the
suppliers in the drug industry.
b. An alternative approach (followed today for tobacco and
alcohol) is to tax the goods heavily. Using the tax apparatus
developed in Chapter 4, show how this reduces the total income
of the suppliers in the drug industry.
c. Comment on the difference between the two approaches.

and on the difference between t
two approaches

D
Price of drugs
Quantity of addictive drugs
A C
E
M
L
BF Y
X
O