Overview
This lecture explains how the demand curve represents the marginal benefit curve, linking individual willingness to pay for goods with society’s overall benefit, and discusses how shifts in preferences impact demand.
Marginal Benefit and Demand
- Marginal benefit is the extra benefit (in currency) a consumer expects from consuming one more unit of a good.
- Marginal utility is a similar concept but generally measured in satisfaction or happiness rather than currency.
- The demand curve plots the maximum willingness to pay (marginal benefit) for each additional unit of a good.
Law of Diminishing Marginal Utility
- As consumers consume more units, the marginal benefit from each additional unit decreases.
- This is reflected in decreasing willingness to pay for successive units.
- Example: The first t-shirt is valued higher than the second, and so on.
Building the Marginal Benefit Curve
- The market marginal benefit curve orders consumers’ willingness to pay for each unit from highest to lowest.
- Each point on this curve shows the highest marginal benefit received for that unit by any consumer.
Shifts in the Marginal Benefit (Demand) Curve
- An increase in tastes and preferences for a good raises the marginal benefit for all quantities, shifting the curve upward.
- A decrease in preferences lowers marginal benefit, shifting the curve downward.
- Non-price determinants like tastes and preferences influence the position of the demand curve.
Demand Curve as Marginal Benefit Curve
- The demand curve reflects the quantity consumers will buy at each price, based on their marginal benefit.
- At any given price, only consumers whose marginal benefit equals or exceeds the price will purchase the good.
- The market demand curve is the sum of all individuals’ willingness to pay for each marginal unit.
Welfare Implications and Consumer Surplus
- If the price equals a consumer’s marginal benefit, they are indifferent between buying or not.
- Consumer surplus is the extra benefit consumers receive when their willingness to pay exceeds the market price.
- Ranking society’s willingness to pay for goods shows the total benefit from consumption.
Key Terms & Definitions
- Marginal Benefit — Extra benefit (measured in currency) gained from consuming one additional unit of a good.
- Marginal Utility — Extra satisfaction or happiness from consuming one additional unit of a good.
- Law of Diminishing Marginal Utility — The principle that marginal benefit decreases as more units are consumed.
- Demand Curve — Graph showing the quantity of a good demanded at various prices, equivalent to the marginal benefit curve.
- Consumer Surplus — The difference between what a consumer is willing to pay and what they actually pay.
Action Items / Next Steps
- Review examples of marginal benefit and demand curve construction.
- Study how changes in tastes and preferences affect the demand curve.
- Prepare for next lecture on market equilibrium and consumer surplus.