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# Marginal Utility

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### Marginal Utility

1. 1. Marginal Utility
2. 2. Utility Theory <ul><li>Total Utility is the full satisfaction of a consumer's wants or needs through the consumption of specific goods or services. </li></ul><ul><li>  Marginal utility is the additional satisfaction, or amount of utility, gained from each extra unit of consumption </li></ul><ul><li>Utility is measures in utils which are units of satisfaction </li></ul>
3. 3. <ul><li>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. </li></ul><ul><li>Demonstrates the law of diminishing marginal utility. </li></ul><ul><li>Total utility will increase at a slower pace as an individual increases the quantity consumed. </li></ul>
4. 4. LAW OF DIMINISHING MARGINAL UTILITY <ul><li>Utility Defined </li></ul><ul><li>Subjective Nature </li></ul><ul><li>Difficult to Quantify </li></ul><ul><li>Total Utility </li></ul><ul><li>Marginal Utility </li></ul><ul><li>graphically examined... </li></ul>
5. 5. 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
6. 6. 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
7. 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
8. 8. 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
9. 9. 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
10. 10. 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
11. 11. 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
12. 12. 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
13. 13. 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
14. 14. Utility Maximizing Rule <ul><li>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. </li></ul><ul><li>illustrated... </li></ul>
15. 15. 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
16. 16. 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
17. 17. 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
18. 18. 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
19. 19. 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?
20. 20. 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
21. 21. 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)
22. 22. 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
23. 23. 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...
24. 24. 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!
25. 25. 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
26. 26. 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 =
27. 29. Example
28. 30. Utility Maximization Formula <ul><li>MU is the marginal utility of the item. </li></ul><ul><li>MU divided by price is the amount of satisfaction per dollar. </li></ul>MU Price of Product A = MU Price of Product B