Utility, Substitution and Demand

9: Questions to think about

• What happens to our calculations if we change the units in which we measure utility?
• What happens to the maximum total utility when the price of a good increases? What does common sense say? Can you confirm this using the interactive exercises?
• Why did we assume diminishing marginal utility? What happens to the optimal proportion of crisps or of nachos if we do not make that assumption?
• We used the same utility function for crisps and for nachos. What happens if we alter this assumption, so that nachos have 1.1 times the utility of an equivalent number of packs of crisps?

Further Online Reading

• The Short Run's page on demand is a glossary explaining substitution effect, income effect, the law of demand and related terms.
• Another interactive tutorial: Utility maximizing choice for a single consumer; derivation of demand curve by Geoffrey Gerdes at UCLA
• More interactive tutorials, this time in the form of files to download and run using Office. These are supplied by Richard Green at the University of Hull
• Consumer Choice (Excel Spreadsheet) (Accompanying Worksheet in .doc format)
• Income and Substitution Effects (Excel Spreadsheet) (Accompanying Worksheet in .doc format)
• Yet another interactive tutorial: Economics Interactive Tutorial on Demand by Samuel Baker at University of South Carolina
• EconWeb "Normal and Inferior Goods" is a sample chapter from a (paid subscription) online textbook
• Alfred Lorn Norman's online notes on consumer theory at the University of Texas are not as introductory as this essay, but were a helpful reference in writing it.
• Test your knowledge of these topics with an interactive quiz on the Logic of Consumer Choice on the Roger A. Arnold textbook site
• These links are all from the Economics LTSN's database of links for learning and teaching in Economics