Chapter 5

Marginal Utility &

Consumer Choice

03/10/17
1999 South-Western College Publishing
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 What is Utility?
The satisfaction or
enjoyment a person
obtains from
consuming a good
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 What is a Util?
A hypothetical unit used to
measure how much
utility a person obtains
from consuming a good
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 What is
Marginal Utility?
The change in total utility
a person derives from
consuming an additional
unit of a good
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 What is Total Utility?
The total number of utils a
person derives from
consuming a specific
quantity of a good
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 TU and MU
Q TU MU
0 0
1 10 10
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2
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 What is the
Law of Diminishing Marginal
Utility?
As more of a good is consumed,
at some point, the marginal
utility a person derives from
each additional unit diminishes

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 Does the Law of
Diminishing Marginal
Utility apply to all goods
consumed?

YES
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 Total Utility

Quantity
TU

9
9
 Marginal Utility

MU

10 0
1
 Demand Curve
P1

P2

Q1 Q2 D
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Why does
MU = P
explain the downward
sloping demand curve?

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 If you are hungry for a
Shawarma, how many
Shawarmas will you buy?

Up to where your
MU = P
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 Why?
Because if MU > P you
will buy another Shawarma
If MU < P you will not
buy that last Shawarma
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 At P1, consume to Q1, since
MU > P up to that point, at
P2, consume to Q2, etc.
P1
P2

MU
Q1 Q2
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Consumer equilibrium

Now go from 1 good to 2

or more goods: have to
take prices of good into
account
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Consumer equilibrium
condition
Purchase X and Y in
amounts such that
MU x = MU y Why?
Px Py
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Assume you are not in
equilibrium say that
MU x > MU y
Px Py
What would you do??

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Purchase more of X (due to its
greater satisfaction per dollar),
and less of Y
But more of X reduces
MUX and less of Y
increases MUY so we are
heading back to
equilibrium!!

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 For more than 2 goods,
the equilibrium condition
becomes..
MUx/Px = Muy/Py =
Muz/Pz = .for all
goods

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In other words, when is your
Total Utility maximized?
When the last dollar spent
on each good yields the
same marginal utility

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Applications of Utility
The water-diamond
paradox--why is water so
cheap and diamonds so
expensive?
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Water-high TU but low
MU due to abundance,
diamonds the opposite-
Price reflects marginal
valuation, not totals

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What statement do these sites
make about the marginal
utility of diamonds?
http://www.rostar.com
http://www.usdiamond.com

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The marginal utility of
money?
Does it diminish as
with goods?
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 Diminishing MU of
money often used as an
argument for
progressive taxation.

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What is Interpersonal
comparison of utility?
A comparison of the
marginal utility that
different people derive
from a good or a dollar
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Economists argue that
we should avoid such
interpersonal utility
comparisons

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 What is
Consumer Surplus?
The difference between
the maximum amount
that a consumer is willing
to pay for something and
what he actually pays
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 Consumer Surplus

Q
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 What happens to
Consumer Surplus as
Market Price changes?
It increases when price
falls and falls when
prices increase
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 What is a Util?
What is Utility?
What is Marginal Utility?
What is Total Utility?
What is the Law of Diminishing
Marginal Utility?
What is a Demand Curve?
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