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# Marginal Utility

## by mscuttle on Oct 16, 2008

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## Marginal UtilityPresentation Transcript

• Marginal Utility
• Utility Theory
• Total Utility is the full satisfaction of a consumer's wants or needs through the consumption of specific goods or services.
•   Marginal utility is the additional satisfaction, or amount of utility, gained from each extra unit of consumption
• Utility is measures in utils which are units of satisfaction
• Although total utility usually increases as more of a good is consumed, marginal utility usually decreases with each additional increase in the consumption of a good.
• Demonstrates the law of diminishing marginal utility.
• Total utility will increase at a slower pace as an individual increases the quantity consumed.
• LAW OF DIMINISHING MARGINAL UTILITY
• Utility Defined
• Subjective Nature
• Difficult to Quantify
• Total Utility
• Marginal Utility
• graphically examined...
• TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 0 10 Units consumed per meal Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7
• TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 0 10 10 Units consumed per meal Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7
• TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 2 0 10 18 10 8 Units consumed per meal Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7
• TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 2 3 0 10 18 24 10 8 6 0 1 2 3 4 5 6 7 Units consumed per meal Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 1 2 3 4 5 6 7
• TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 2 3 4 0 10 18 24 28 10 8 6 4 Units consumed per meal Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7
• TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 2 3 4 5 0 10 18 24 28 30 10 8 6 4 2 Units consumed per meal Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7
• TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 2 3 4 5 6 0 10 18 24 28 30 30 10 8 6 4 2 0 Units consumed per meal Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7
• TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 2 3 4 5 6 7 0 10 18 24 28 30 30 28 10 8 6 4 2 0 -2 Units consumed per meal Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 TU MU 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7
• TOTAL AND MARGINAL UTILITY Tacos consumed per meal Total Utility, Utils Marginal Utility, Utils 0 1 2 3 4 5 6 7 0 10 18 24 28 30 30 28 10 8 6 4 2 0 -2 Units consumed per meal Units consumed per meal 30 20 10 Total Utility (utils) Marginal Utility (utils) 10 8 6 4 2 0 -2 TU MU 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7 Observe Diminishing Marginal Utility
• Utility Maximizing Rule
• The consumer’s money income should be allocated so that the last dollar spent on each product yields the same amount of extra (marginal) utility.
• illustrated...
• First 10 10 24 12 UTILITY MAXIMIZING COMBINATION How should the \$10 income be allocated? Unit of product Product A: Price = \$1 Product B: Price = \$2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price) \$ 10 income
• First 10 10 24 12 Examine the two marginal utilities Unit of product Product A: Price = \$1 Product B: Price = \$2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price) UTILITY MAXIMIZING COMBINATION \$ 10 income
• First 10 10 24 12 Examine the two marginal utilities … per dollar Unit of product Product A: Price = \$1 Product B: Price = \$2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price) UTILITY MAXIMIZING COMBINATION \$ 10 income
• First 10 10 24 12 Decision: Buy 1 Product B for \$2 Unit of product Product A: Price = \$1 Product B: Price = \$2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price) UTILITY MAXIMIZING COMBINATION \$ 10 income
• First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 Fifth 5 5 12 6 Sixth 4 4 6 3 Seventh 3 3 4 2 Unit of product Product A: Price = \$1 Product B: Price = \$2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price) UTILITY MAXIMIZING COMBINATION \$ 10 income What next?
• First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 Fifth 5 5 12 6 Sixth 4 4 6 3 Seventh 3 3 4 2 Unit of product Product A: Price = \$1 Product B: Price = \$2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price) UTILITY MAXIMIZING COMBINATION \$ 10 income What next? Buy one of each
• First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 Fifth 5 5 12 6 Sixth 4 4 6 3 Seventh 3 3 4 2 Unit of product Product A: Price = \$1 Product B: Price = \$2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price) UTILITY MAXIMIZING COMBINATION \$ 10 income and then... (\$5 left)
• First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 Fifth 5 5 12 6 Sixth 4 4 6 3 Seventh 3 3 4 2 Unit of product Product A: Price = \$1 Product B: Price = \$2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price) UTILITY MAXIMIZING COMBINATION \$ 10 income third unit of product B
• First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 Fifth 5 5 12 6 Sixth 4 4 6 3 Seventh 3 3 4 2 Unit of product Product A: Price = \$1 Product B: Price = \$2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price) UTILITY MAXIMIZING COMBINATION \$ 10 income \$3 left...
• First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 Fifth 5 5 12 6 Sixth 4 4 6 3 Seventh 3 3 4 2 Unit of product Product A: Price = \$1 Product B: Price = \$2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price) UTILITY MAXIMIZING COMBINATION \$ 10 income \$3 left... Buy both!
• First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 Fifth 5 5 12 6 Sixth 4 4 6 3 Seventh 3 3 4 2 Unit of product Product A: Price = \$1 Product B: Price = \$2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price) UTILITY MAXIMIZING COMBINATION \$ 10 income Income is gone... the last dollar spent on each good gave the same utility (8) per dollar
• Algebraic Restatement of the Utility Maximization Rule = UTILITY MAXIMIZING COMBINATION MU of product A Price of A MU of product B Price of B 8 Utils \$1 16 Utils \$2 =
•
•
• Example
• Utility Maximization Formula
• MU is the marginal utility of the item.
• MU divided by price is the amount of satisfaction per dollar.
MU Price of Product A = MU Price of Product B