CH6: The Theory of Demand: The Utility Approach

Question 1

What are the different types of supply elasticity?

Answer 1

Measures how responsive quantity supplied is to a change in price.

Types:
Perfectly Inelastic (Es = 0): Quantity doesn’t change

Inelastic (Es < 1): Quantity changes less than price

Unit Elastic (Es = 1): Quantity changes exactly as price does

Elastic (Es > 1): Quantity changes more than price

Perfectly Elastic (Es = ∞): Any price drop → supply = 0; firms supply unlimited at one price

Question 2

What is utility, total utility, and marginal utility in economics?

Answer 2

Utility: Satisfaction or benefit gained from consuming a good or service.
Total Utility (TU): Total satisfaction from consuming all units of a good.
Marginal Utility (MU): Extra satisfaction from consuming one more unit.

Key Rule:
MU typically decreases as more units are consumed (Law of Diminishing Marginal Utility).

Question 3

what is cardinal utility?

Answer 3

Assumes utility can be measured in exact numbers (e.g. 10 utils).
Key Point: Allows comparison of how much more one good satisfies than another.
Used for: Total and marginal utility analysis.

Question 4

what is consumer equilibrium in the utility approach?

Answer 4

The point where a consumer maximizes total utility given their limited income and the prices of goods.

Condition:
Marginal Utility of Good X ÷ Price of Good X = Marginal Utility of Good Y ÷ Price of Good Y

Meaning:
The consumer gets equal utility per rand spent on each good — no need to change their spending pattern.

Question 5

what is ordinal utility?

Answer 5

Ranking preferences without assigning numerical values.

Question 6

what is the formula for consumer equilibrium with three goods?

Answer 6

MU_B/P_B = MU_M/P_M = MU_R/P_R

Question 7

what must be true for consumer equilibrium?

Answer 7

All income is spent and weighted marginal utilities are equal.