2. Marginal utility Why individual’s demand curves are often downward sloping. Whatever that means.
3. Where we are Marginal utility and downward sloping demand curves. Friedman, Microeconomics, chapter 6.
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5. Marginal utility diminishes because of satiation “ Marginal utility” is the extra pleasure we get from consuming one more thing. It diminishes because we become “sated” – we have had enough. I could never tire of some things
6. Marginal Utility diminishes The more you have, the less you want more. The first time is GREAT!!! The second time is Wonderful! The third time is really good. The fourth time is nice. The fifth time . . . “I have a headache” Things are less exciting when you have a lot. Even sex, drugs and rock and roll.
7. A graph of diminishing marginal utility About here you barf
9. Drink until MU = cost of wine Drink whenever the MU is at least as great as the cost. Don’t drink where MU is less than the cost
10. The Faux punchline: Demand curve is downward sloping Your individual demand curve for wine is downward sloping Buy where MU=price. Higher prices, higher MU, less wine. Lower prices, lower MU, more wine. Careful: This does not mean that the community’s demand curve is downward sloping!
11. Not all products have diminishing marginal utility Be careful of those that don’t; unless you like rehab.
12. If everyone acts the same in society as they would outside, then total demand at any price would be the sum of individual demands
13. The orthodox idea: Assuming that everyone is alike, and no one influences anyone else, the aggregate demand curve is the sum of individual demand curves
14. This way we need to know only one thing How one person values things. The orthodox assume everyone else is the same; and the total is the sum of all the individuals.
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16. If these conditions do not hold, then aggregate demand curves may not slope down And raising prices may increase demand for a product. That would be strange. Life is like that sometimes.
17. Robinson Crusoe’s life was strange He lived all alone. But, at least his demand curves sloped down. P Q Robinson Crusoe’s demand for coconuts
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19. Here’s how you figure it out You will pay up to the MU for that scoop. MU is the change in total utility. The MU of the first is $15. The MU of the second is the change, or $27-15= $12. The MU of the third is $36-27 = $9. You will pay $9 for the third scoop. Scoop Total pleasure Marginal utility 1 $15 2 $27 3 $36 4 $42 5 $45 6 $45 7 $42 8 $36
20. Demand curve: how much you will buy at any price At $15 you will buy only one scoop. At $12, the second scoop is a good buy. At $3, you’ll buy 5 scoops. (Maybe give one to the dog.) Your demand is the same as your MU.
21. How much will the community buy? If there are 100 people, and you assume that they are all like you, then multiply the number of scoops at any price by 100! You Community Price 1 100 $15 2 200 $12 3 300 $9 4 400 $6 5 500 $3
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Editor's Notes
The essential psychological idea of orthodox, or “neoclassical,” theory is that the more we have, the less we value additional amounts. The value we put on one-more-item of anything is called the “marginal utility.” (“Marginal” refers to the next; “utility” refers to the pleasure we get from something.
This graph shows the pleasure, measured in some arbitrary and subjective units, that you might get from drinking additional glasses of wine. The “marginal utility” from the first glass, might be 20 units. The marginal utility declines on each glass, to 17.5, 15, 11, 6, and 0 because the more wine we have consumed, the less we enjoy more.
If we value the MU in money, then we have a downward sloping demand curve. We would pay $20 for the first glass, but only $15 for the third, and nothing for the sixth.
There are products where the marginal utility is upward sloping so that the more you have consumed, the more you want. We call these “addictive” and generally restrict access to them on the grounds that individuals who start to use them will want (“crave”) them more and more until they do nothing else.
Marginal utility theory was devised for Robinson Crusoe whose preferences were completely independent of any social influences.
The orthodox theory constructs an aggregate demand curve, the amount that everyone would buy at any price, by adding up the amount that each individual would buy at any price. This assumes that each individual demand curve is independent of what anyone else is consuming, as if there is no social influence on preferences.
A sociopath makes no association with other people, acts in society as if he or she were all alone. Orthodox economic theory acts as if we were all suffering from this personality disorder.
Marginal utility is the change in total pleasure from adding one more unit. Presumably, a consumer would buy up until the point where Price equals MU.
If everyone consumed without regard for what others were doing, total consumption at any price equals the sum of the amount that each would consume at that price. (If everyone were identical, then this would be the amount that one person would consume at that price times the number of people in the community.)
