PowerPoint PresentationTheory of Consumer DemandUtilitySlide 4Slide 5Slide 6Slide 7Slide 8Slide 9Points to ponder: 1Points to ponder: 2Points to ponder: 3Points to ponder: 4Points to ponder: 5Slide 15AGEC/FNR 406 LECTURE 4Collecting fragments of coal in a rail yard in ChinaTheory of Consumer DemandLecture Goals:1. Briefly review of demand theory2. Discuss features of demand curves.3. Identify importance of these concepts for environmental and resource economics.UtilityBecause resources provide utility, individuals want them.Utility = “value” (not necessarily in $ terms)Four basic laws of demand1. Consumers prefer more to less2. Value rises at a decreasing rate3. Consumers aim to balance consumption4. Consumers face budget constraintsExample: utility from coal0 1 2 3 4 5 6 7Units of coalutilityUtility is increasing at a decreasing rate6050403020100Indifference curve: two forms of recreationBeach tripsSki tripsAt all points along the indifference curve, an individual is “indifferent” about receiving the corresponding bundles of goods.Indifference curve: two forms of recreationBeach tripsSki tripsIndividuals substituteIndifference curve: two forms of recreationBeach tripsSki tripsUtility is increasing“more is better”Utility MaximizationTwo part processPart 1Beach tripsSki tripsBudget Constraint:At all points along the budget constraint, an individual’s incomeis completely exhausted. Income PSKI Income PBEACH0 0••Utility MaximizationTwo part processPart 2Beach tripsSki trips Income PSKI Income PBEACH0 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 tripsPoints to ponder: 1The 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.Points to ponder: 2The mixture of environmental quality and consumer goods that we observe is the result of a lot of individual decisions about what tradeoffs are acceptable.Points to ponder: 3Consumers prefer more to less, but have finite resources and are forced to make tradeoffs. This pattern is also repeated at the level of society.Points to ponder: 4The 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.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