ECO-4 Lecture Notes - Lecture 8: Reservation Price, Takers, Demand Curve
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Definition: spending should be allocated across goods and services so that the marginal utility per dollar is the same for each good. Total utility will be satisfied when following equation is satisfied: (see example on alice"s beef and venison) If the ratio were higher for one good than for another, the consumer could always increase her total utility by buying more of the first good than the second. Rational spending rule applies to goods that are perfectly divisible e. g. milk. Allocate each additional dollar you spend to the good for which your marginal utility per dollar is highest. Market demand curve = add individual demand curves together. E. g. select a price and then add the quantity demanded by each buyer at this price. Consumer surplus: difference between a buyer"s reservation price for a good and the price actually paid. When a product can be sold only in whole-number amounts, its demand curve has the.