Overview
This lecture explains how the demand curve represents the marginal benefit curve, linking individual willingness to pay, the law of diminishing marginal utility, and market demand for efficient allocation in society.
Marginal Benefit and Willingness to Pay
- Marginal benefit (MB) is the extra benefit, usually in currency, from consuming one extra unit of a good.
- MB is closely related to marginal utility, which is benefit measured in utility (happiness or satisfaction).
- Consumers' maximum willingness to pay for each unit is determined by their perceived marginal benefit.
- MB decreases as more units are consumed due to the law of diminishing marginal utility.
Construction of the Marginal Benefit Curve
- For each consumer, rank willingness to pay for each successive unit from highest to lowest.
- The highest MB for the first unit is assigned to the consumer who values it most, and so on for further units.
- By joining these values, we derive society’s marginal benefit curve.
- The MB curve shows the maximum benefit to society from each additional unit consumed.
Demand Curve and Marginal Benefit Curve Relationship
- The demand curve and the marginal benefit curve are essentially the same; both show the maximum willingness to pay for each quantity.
- If the price equals marginal benefit, consumers will buy that quantity until MB equals or just exceeds the price.
- The market demand curve aggregates individual MBs for all consumers in descending order.
Shifts in the Marginal Benefit/Demand Curve
- If tastes and preferences increase, the MB curve shifts upward (higher willingness to pay at all quantities).
- If tastes and preferences decrease, the MB curve shifts downward (lower willingness to pay at all quantities).
- Changes in non-price determinants (e.g., advertising, trends) can shift the MB/demand curve.
Law of Diminishing Marginal Utility
- As consumers purchase more of a good, the additional benefit (MB) from each extra unit falls.
- This underlies the downward slope of both the MB and demand curves.
Consumer Surplus
- Consumer surplus is the extra benefit consumers receive when they pay less than their maximum willingness to pay (MB).
- At the point where MB equals price, the consumer is indifferent between buying or not buying the good.
Key Terms & Definitions
- Marginal Benefit (MB) — Extra benefit from consuming one more unit of a good, usually measured in currency.
- Marginal Utility — Extra satisfaction or happiness from one additional unit of a good.
- Law of Diminishing Marginal Utility — Principle that additional units of a good provide less added benefit.
- Demand Curve — Graph showing the relationship between price and quantity demanded, reflecting maximum willingness to pay.
- Consumer Surplus — Benefit gained when consumers pay less than their MB/willingness to pay.
Action Items / Next Steps
- Review how shifts in tastes and preferences affect the demand/marginal benefit curve.
- Be prepared to apply the relationship between MB and the demand curve to market equilibrium problems.
- Watch the next lecture for consumer surplus and welfare analysis.