#### Transcript 1999 South-Western College Publishing

```Principles of Economics
2nd edition
by Fred M Gottheil
PowerPoint Slides prepared by Ken Long
1
Chapter 5
Marginal Utility &
Consumer Choice
4/9/2016
2
This chapter discusses
principles associated with
The Law of Diminishing
Total
Measurement
Consumer
and Marginal
Surplus
of Utility
Utility
Marginal Utility
3
What is a Util?
A hypothetical unit used to
measure how much
utility a person obtains
from consuming a good
4
What is Utility?
The satisfaction or
enjoyment a person
obtains from
consuming a good
5
What is
Marginal Utility?
The change in total utility
a person derives from
unit of a good
6
What is Total Utility?
The total number of utils a
person derives from
consuming a specific
quantity of a good
7
What is the
Law of Diminishing
Marginal Utility?
As more of a good is
consumed, the utility a
person derives from each
8
Does the Law of
Diminishing Marginal
Utility apply to all goods
consumed?
YES
9
What statement do these sites
utility of diamonds?
http://www.rostar.com
http://www.usdiamond.com
10
Total Utility
Quantity
1
11 1
Marginal Utility
Quantity
1
12 2
What is a
Demand Curve?
A demand curve shows
how many units will be
demanded at various prices
13
Why do Demand
Curves slope downward
to the right?
Because quantity
demanded increases as
price declines
14
Demand Curve
P1
P2
Q1
Q2
D
15
15
What is the
difference between
Wants and Demand?
We live in a world of
unlimited wants - but the
things that you demand
are those things you are
16
How many hot dogs will
Up to the quantity that yields
MU = P
17
Why?
Because if MU > P you
If MU < P you will not
18
Utility maximized?
completely spent and the
last dollar spent on each
good yields the same
marginal utility
19
Why does
MU = P
explain the downward
sloping demand curve?
20
MU = P1
P1
P2
MU = P2
Q1
Q2
21
21
What is
Consumer Surplus?
The difference between
the maximum amount
that a consumer is willing
to pay for something and
what he actually pays
22
Consumer Surplus
P
Q
23
23
What happens to
Consumer Surplus as
Market Price changes?
It increases when price
falls and falls when
prices increase
24
What is Interpersonal
comparison of utility?
A comparison of the
marginal utility that
different people derive
from a good or a dollar