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PRINCIPLES OF MICROECONOMICS
(PMI511S)
Economists
use the term utility to describe the pleasure or satisfaction that a consumer obtains from his or her
consumption of goods and services.
Utility
Utility is the degree of satisfaction a consumer Characteristics of utility
derives from the consumption of a good
or service. Utility differs from person to person.
0 0 0
1 30 30
2 46 16 Marginal utility
3 56 10
4 60 4
5 55 -5
6 45 -10
CONSUMER UTILITY
Consumer Equilibrium
A consumer will maximize total utility when the weighted marginal utility
of the goods consumed are equal.
The weighted marginal utility is the marginal utility divided by the price
of the good.
CONSUMER
UTILITY
A consumer will maximize total utility when the weighted marginal utility of the
goods consumed are equal.
The weighted marginal utility is the marginal utility divided by the price of the
good.
Where:
MUx MUY MUx = marginal utility of good x
----- = ------ Px = price of good x
Px Py MUy = marginal utility of good y
Py = price of good y
All consumers face an INCOME CONSTRAINT. Under that constraint the best a
consumer can do is to maximize total utility.
CONSUMER
UTILITY
All consumers face an INCOME CONSTRAINT. Under that constraint the best a
consumer can do is to maximize total utility.
Example: TU MU MU/P Quantity TU MU MU/P
Sylvia’s budget: N$20chicken consumed
chicken chicken chips chips chips
Chicken: N$2 per piece
Chips: N$3 per packet
0 0 - 0 0 0 -
20 20 10 1 25 25 8.3
34 14 7 2 41 16 5.3
44 10 5 3 53 12 4
50 6 [3] 4 62 9 [3]
In summary:
Consumer Surplus
Consumer surplus is the difference between what consumers would have been
willing to pay and what they actually pay.