agec/fnr 406 lecture 4 collecting fragments of coal in a rail yard in china
TRANSCRIPT
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AGEC/FNR 406 LECTURE 4
Collecting fragments of coal in a rail yard in China
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Theory of Consumer Demand
Lecture Goals:
1. Briefly review of demand theory
2. Discuss features of demand curves.
3. Identify importance of these concepts for environmental and resource economics.
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Utility
Because resources provide utility, individuals want them.
Utility = “value” (not necessarily in $ terms)
Four basic laws of demand
1. Consumers prefer more to less
2. Value rises at a decreasing rate
3. Consumers aim to balance consumption
4. Consumers face budget constraints
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Example: utility from coal
0 1 2 3 4 5 6 7
Units of coal
utility
Utility is increasing at a decreasing rate
60
50
40
30
20
10
0
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Indifference curve: two forms of recreation
Beach trips
Ski tripsAt all points along the indifference curve, an individual is “indifferent” about receiving the corresponding bundles of goods.
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Indifference curve: two forms of recreation
Beach trips
Ski trips
Individuals substitute
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Indifference curve: two forms of recreation
Beach trips
Ski trips
Utility is increasing“more is better”
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Utility MaximizationTwo part process
Part 1
Beach trips
Ski trips
Budget Constraint:
At all points along the budget constraint, an individual’s incomeis completely exhausted.
Income PSKI
Income PBEACH
0 0
•
•
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Utility MaximizationTwo part process
Part 2
Beach trips
Ski trips
Income PSKI
Income PBEACH
0 0
•
•
Tangency:
Tangency of budget constraint with the indifference curve identifies the point of optimal consumption for the individual. This corresponds to a single point (price-quantity combination) on the demand curve.
•# skitrips
# beach trips
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Points to ponder: 1
The fact that utility is increasing at a decreasing rate means that the first few units of an environmental improvement will have a larger impact on individuals (and society) than subsequent improvements.
Examples: clean water, clean air, nationalparks, reductions in pesticide
residue or pesticide exposure.
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Points to ponder: 2
The mixture of environmental quality and consumer goods that we observe is the result of a lot of individual decisions about what tradeoffs are acceptable.
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Points to ponder: 3
Consumers prefer more to less, but have finite resources and are forced to make tradeoffs.
This pattern is also repeated at the level of society.
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Points to ponder: 4
The budget constraint depends onboth income and prices.
When prices change, this will cause a shift in patterns of consumption due to “income” and “substitution” effects.
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Points to ponder: 5
Higher incomes mean we can enjoy more environmental improvements, if we choose to.
Poor individuals and poor countries are generally more sensitive to the tradeoffs that environmental improvements require.
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