Transcript Marginal Utility

MARGINAL UTILITY
In relation to consumers!!!!!!
MARGINAL UTILITY
•Marginal = Extra
•Utility = Satisfaction
DIMINISHING MARGINAL
UTILITY
•Lets test:
• If a consumer consumes 1 extra unit
(marginal) of a good or service in
succession what happens to their utility
(satisfaction) after the consumption of
that good.
Yum 10
out of 10
Yum 10
out of 10
Ok 8 out
of 10
Ghosty 6
out of 10
LAW OF MARGINAL UTILITY
DEFINING
As additional units of a G or S are consumed
(consecutively) Total Utility increases at a
decreasing rate.
Or
As additional units of a G or S are consumed
(consecutively) Marginal Utility decreases.
CRITERIA
• LI: Understand and apply the Law of Diminishing Marginal Utility
REVISIT
Yum 10
out of 10
Yum 10
out of 10
Ok 8 out
of 10
Ghosty 6
out of 10
LAW OF MARGINAL UTILITY
As additional units of a G or S are consumed
(consecutively) Total Utility increases at a
decreasing rate.
Or
As additional units of a G or S are consumed
(consecutively) Marginal Utility decreases.
THE OPTIMUM PURCHASE RULE P = MU
• Consumers will/should continue to consume up to where Price is equal to
Marginal Utility (P = MU) as they will maximise their total utility.
THE OPTIMUM PURCHASE RULE P = MU
• P = MU
• P falls to P¹
• P¹ ≠ MU (P¹ < MU)
• Incentive to consume more
• MU falls
• P¹ = MU
• Therefore a demand curve is drawn
downward sloping to the right (i.e. as
price falls, quantity demanded will
increase)
THE OPTIMUM PURCHASE RULE P = MU
• P = MU
• P rises to P¹
• P¹ ≠ MU (P¹ > MU)
• Incentive to consume less
• MU rises
• P¹ = MU
• Therefore a demand curve is drawn
downward sloping to the right (i.e. as
price rises, quantity demanded will fall)
THE OPTIMUM PURCHASE RULE P = MU
A rational consumer will consume successive units of a good until they reach
the point where P = MU. At this point the price that they are paying for the
additional unit matches the marginal utility that they are receiving.
If P < MU then the consumer has an incentive to consume more because
they are ‘getting a bargain’ (i.e. receiving more marginal utility than they
are paying for)
If P > MU then the consumer has an incentive to consume less because they
are ‘getting ripped off’ ( i.e. receiving less marginal utility than they are
paying for)
Demand schedule for Ang Agassi
Price ($)
70
40
20
Quantity (3packs)
1. Fill in the
missing gaps
for Table 1
2. Complete
the demand
schedule for
Ang Agassi
3. Graph Ang
Agassi’s
Demand
Curve.
4. Explain why
the demand
curve slopes
downward.
TABLE 1
Angela Agassi’s Utility Schedule for
Tennis Balls
Quantity
Consumed Total utility Marginal
(packs of ($)
utility ($)
three)
1
60
2
40
3
120
4
5
ANSWERS
Demand schedule for Ang Agassi
Price ($)
Quantity (3packs)
70
0
40
2
20
3
TABLE 1
Angela Agassi’s Utility Schedule for
Tennis Balls
Quantity
Consumed Total utility Marginal
(packs of ($)
utility ($)
three)
60
1
60
100
2
40
20
3
120
125
4
5
4.
If Angela is a rational consumer she will purchase packs of tennis balls, until she
reaches the point where P=MU (optimal purchase rule).
When the price of tennis balls falls, P<MU.
Because P<MU, there is an incentive for Angela to increase her consumption
of tennis balls. As she consumes additional units, MU will fall.
Therefore a demand curve is drawn downward sloping to the right (i.e.
as price falls, quantity demanded will increase)
CRITERIA
• LI: Understand and apply the Law of Diminishing Marginal Utility.
• Use the Law of Diminishing Marginal Utility to describe the demand curve
• Use Equal marginal rule to calculate the optimum amount of a good or
service a consumer should consume to maximise his/her utility
QUIZ
• (a)
Define marginal utility.
Quantity
Purchas
ed
Total
Utility
0
0
10
1
750
8
2
3
4
Marginal
Utility
(cents)
600
Price
Quantity
($)
(DVD’S)
6
4
1 770
300
(d) Use the law of
diminishing marginal
utility to explain why
Sam’s demand
curve for DVDs will
slope downward to
the right.
ANSWERS
As additional units of a G or S are consumed (consecutively)
Total Utility increases at a decreasing rate.
Or
As additional units of a G or S are consumed (consecutively)
Marginal Utility decreases.
Quantity
Purchas
ed
Total
Utility
0
0
0
1
750
750
2
1 350
600
3
1 770
4
2 070
Marginal
Utility
(cents)
420
300
Price
Quantity
($)
(DVD’S)
10
0
8
0
6
2
4
3
The law of diminishing marginal
utility states that as more of a
good or service is consumed
successively marginal utility falls.
A rational consumer will only
increase consumption if P=MU.
As consumption increases from 1
to 2 goods MU falls from 750 to
600. The consumer will only
purchase additional units if the
price is lowered to where P=MU.
Therefore a demand curve is
drawn downward sloping to the
right
THE LAW OF EQUAL MARGINAL UTILITY
AND CONSUMER EQUILIBRIUM
How can a consumer maximise his Utility on the next dollar spent.
What combination of goods/service is going to give the highest amount of
utility.
INFORMATION WE HAVE:
Budget (fixed amount of money)
MU of both goods
Price of both goods
Formula
Equi marginal rule
𝑀𝑈𝑎 𝑀𝑈𝑏
=
𝑃𝑎
𝑃𝑏
EXAMPLE
If Jimbo had $11 to spend, what combination of
chips and burgers he should buy to maximise his
utility.
Price of burgers ($5)
Price of chips ($2)
Price of burgers ($5)
Price of chips ($2)
Quantity
MUx
MUa/Pa
MUy
MUb/Pb
Quantity
MUx
MUa/Pa
MUy
MUb/Pb
1
55
20
1
55
11
20
10
2
35
16
2
35
7
16
8
3
15
14
3
15
3
14
7
4
3
6
4
3
0.6
6
3
QUICK QUIZ
• Jack and Jill both earn $10 pocket money. They spend all $10 on chips and
lollies. Jill purchases six packets of chips and two packets of lollies.
• Use table 1 to determine the quantity of chips and lollies Jack should
purchase to maximise his total utility.
• A packet of chips costs $1 and a packet of lollies costs $2.
Quantity of
Marginal utility
MUa/MUb
Quantity of
Marginal utility
MUa/MUb
chips (packet)
(utils)
chips
lollies (packet)
(utils)
lollies
1
400
1
400
2
350
2
300
3
250
3
200
4
100
4
100
5
50
5
50
ANSWER
4 packets of chips
3 packets of lollies
Quantity of
Marginal utility
MUa/Pa
Quantity of
Marginal utility
MUa/Pa
chips (packet)
(utils)
chips
lollies (packet)
(utils)
lollies
1
400
400
1
400
200
2
350
350
2
300
150
3
250
250
3
200
100
4
100
100
4
100
50
5
50
50
5
50
25