Lecture 2

UTILITY
Law of diminishing marginal utility

Coke

Coke

Coke

Coke

Coke

Coke

Utility is the want satisfying capacity of a good or product or

commodity
It is the amount of satisfaction a consumer derives from
consuming a product
Marginal utility is the amount of satisfaction derived from each
additional unit of a product consumed

UTILITY

1st Drink

1
Recycle
Bin

Marginal Utility Derived

0 Units

2 Units

4 Units

8 Units

10 Units

UTILITY

2nd Drink

2
Recycle
Bin

Marginal Utility Derived

0 Units

2 Units

4 Units

8 Units

10 Units

UTILITY

3rd Drink

3
Recycle
Bin

Marginal Utility Derived

0 Units

2 Units

4 Units

8 Units

10 Units

UTILITY

4th Drink

4
Recycle
Bin

Marginal Utility Derived

0 Units

2 Units

4 Units

8 Units

10 Units

UTILITY

5th Drink

5
Recycle
Bin

Marginal Utility Derived

0 Units

2 Units

4 Units

8 Units

10 Units

UTILITY

6th Drink

6
Recycle
Bin

Marginal Utility Derived

- 2 Units

0
Units

2 Units

4 Units

8 Units

10 Units

UTILITY
Drink Consumed

Utility Meter

UTILITY
Satisfaction Metre
Excellent

Price Prepared
To Pay

1.00

Very
Good

0.75

Good

Drink Consumed

6th

5th

4th

3rd

2nd

1st

Enough

As the quantity consumed

increases, the amount of
satisfaction (utility) derived
from each additional unit
eventually declines.

0.25

Therefore the amount one

is prepared to pay for each
additional unit will also fall
as the quantity consumed
increases.

The Law of Demand.

Demand

0.50

OK

Law of Diminishing
Marginal Utility

THE LAW OF DEMAND

Demand Curve

Price
1.00

There is an inverse
relationship between the
price of a Product and the
Quantity demanded.
OR .
Since the satisfaction
derived from each
additional unit diminishes,
the price consumers are
prepared to pay is less for
each additional unit.

0.75

0.50

0.25

Qty Consumed (Cans)

THE LAW OF DEMAND

Demand Schedule

Q
0
1
2
3
4
5
6

A
B
C
D
E
F
G

Demand equation:
P = 24 4Q

P
24
20
16
12
8
4
0

TR = PxQ
0
20
32
36
32
20
0

A
B
C
D
E
F
G

THE LAW OF DEMAND

Total Revenue (TR) = P x Q

Demand equation:
P = 24 4Q
So TR = PxQ = 24Q 4Q2

AA
BB
CC
DD
EE
FF
GG

QQ
00
11
22
33
44
55
66

PP
24
24
20
20
16
16
12
12
88
44
00

TR==PxQ
PxQ
TR
00
20
20
32
32
36
36
32
32
20
20
00