Transcript No Slide Title

Chapter 5
Marginal Utility &
Consumer Choice
7/17/2015
©1999 South-Western College Publishing
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What is Utility?
The satisfaction or
enjoyment a person
obtains from
consuming a good
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What is a Util?
A hypothetical unit used to
measure how much
utility a person obtains
from consuming a good
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What is
Marginal Utility?
The change in total utility
a person derives from
consuming an additional
unit of a good
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What is Total Utility?
The total number of utils a
person derives from
consuming a specific
quantity of a good
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TU and MU
Q
0
1
2
3
4
5
6
7
TU
0
10
18
24
28
30
30
28
MU
10
8
6
4
2
0
-2
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What is the
Law of Diminishing Marginal
Utility?
As more of a good is
consumed, at some point, the
marginal utility a person
derives from each additional
unit diminishes
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Does the Law of
Diminishing Marginal
Utility apply to all goods
consumed?
YES
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Total Utility
TU
Quantity
9
9
Marginal Utility
MU
1
10 0
Demand Curve
P1
P2
Q1
Q2
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Why does
MU = P
explain the downward
sloping demand curve?
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If you are hungry for a
hot dog, how many hot
dogs will you buy?
Up to where your
MU = P
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Why?
Because if MU > P you
will buy another hot dog
If MU < P you will not
buy that last hot dog
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At P1, consume to Q1, since
MU > P up to that point, at
P2, consume to Q2, etc.
P1
P2
MU
Q1
Q2
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Consumer equilibrium
Now go from 1 good to 2
or more goods: have to
take prices of good into
account
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Consumer equilibrium
condition
Purchase X and Y in
amounts such that
MU x = MU y Why?
Px
Py
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Assume you are not in
equilibrium… say that
MU x > MU y
Px
Py
What would you do??
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Purchase more of X (due to its
greater satisfaction per dollar),
and less of Y
But more of X reduces
MUX and less of Y
increases MUY so we are
heading back to
equilibrium!!
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For more than 2 goods,
the equilibrium condition
becomes…..
MUx/Px = Muy/Py =
Muz/Pz = …….for all
goods
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In other words, when is your
Total Utility maximized?
When the last dollar spent
on each good yields the
same marginal utility
©1999 South-Western College Publishing
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Applications of Utility
• The water-diamond
paradox--why is water so
cheap and diamonds so
expensive?
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Water-high TU but low
MU due to abundance,
diamonds the oppositePrice reflects marginal
valuation, not totals
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What statement do these sites
make about the marginal
utility of diamonds?
http://www.rostar.com
http://www.usdiamond.com
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The marginal utility of
money?
•Does it diminish as
with goods?
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Diminishing MU of
money often used as an
argument for
progressive taxation.
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What is Interpersonal
comparison of utility?
A comparison of the
marginal utility that
different people derive
from a good or a dollar
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Economists argue that
we should avoid such
interpersonal utility
comparisons
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What is
Consumer Surplus?
The difference between
the maximum amount
that a consumer is willing
to pay for something and
what he actually pays
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Consumer Surplus
P
Q
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What happens to
Consumer Surplus as
Market Price changes?
It increases when price
falls and falls when
prices increase
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• What is a Util?
• What is Utility?
• What is Marginal Utility?
• What is Total Utility?
• What is the Law of Diminishing
Marginal Utility?
• What is a Demand Curve?
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