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UTILITY

 Utility is satisfaction.
 We get utility from the consumption of goods and
services.
 We aim to maximise our total utility.
 Utility can be measured in units called “Utils”
MARGINAL UTILITY
 Marginal utility is the
extra satisfaction we
get from consuming M
one more unit of a U
good. $

 The law of diminishing


marginal utility states
that as we consume
more of the same
good MU will begin to units
fall.
Example
 Sam loves cream donuts. The first donut he eats gives him 18 utils of
satisfaction. The second donut gives him 12 utils of satisfaction. The third
donut gives him 7 utils of satisfaction and the fourth donut gives him 1
util .
 Copy and complete the table below then draw Sam's total and
marginal utility graphs

Number of Marginal Total Utility


Total and
Donuts Utility (extra from all
marginal
satisfaction) Donuts Utility
consumed

4
Number
of donuts
Copy and complete the following statements

Falls
• Marginal Utility __________ as more donuts are consumed

increases
• Total Utility ____________ as more donuts are consumed but at a
Slower
____________ rate

0
• Total Utility will be the greatest when Marginal Utility equals ____

Negative
• Total Utility will fall if marginal utility is ___________
Total Utility and Marginal Utility
When TU is maximum
$ $
MU = 0

TU

Q
Q
q1 q1
MU
Putting a $ Value on Utility
 A person can put a dollar value on personal satisfaction
from consuming an item.

 This value will be different for each person based on


their personal preferences (i.e. Sam really likes cream
donuts so may put on a higher dollar value on cream
donuts than his workmate.
Example –
Sam values each util at 50cents
Complete the final column in the table below
Quantity Marginal Utility Marginal Utility in dollars
(each util is worth .50)

1 18 9
2 12 6
3 7 3.50
4 1
0.50
How many donuts will sam buy if the market price is each of the following ( Remember MU$
in the chart above represents sams personal satisfaction ($ value) from the last donut)

1
$8 =__________

2
$5 = __________

3
$2 = __________
Marginal Analysis
 What we have just done is used the concept of marginal analysis to help
in our decision making.

 Marginal Analysis = comparing the extra benefit with the extra cost in
making a decision

 When deciding how many donuts Sam would consume at the given
prices. We compared how much extra benefit (MU) Sam would gain
against the extra cost (price)
OPTIMAL PURCHASE RULE
 A consumer will
consume up to the point
where P = MU.

 A consumer will only


buy extra units if their
value of personal
satisfaction from the
extra unit is above or
equal to the price they
have to pay.
Using the Optimal Purchase Rule to
find a persons Demand for a good or
service
 A persons demand for a good or service can be
defined as
 The amount of a good or service that a person is willing
and able to buy at each price level

 Marginal Utility will determine a person’s demand for a


good or service.

 An individual demand curve is the same as their


marginal utility (dollars) curve.
Illustration Exercise
 Complete the worksheet
and stick into your notes
DEMAND
 Using P=MU and a
consumers MU curve we
Mu can derive their demand.
$

unit $

mu D
Q
Demand and Marginal Utility
 The price that a person is willing to pay for a extra unit is
determined by their marginal utility from that unit

 Earlier units of consumption have a higher marginal


utility therefore consumers are willing to pay a higher
price

 Consumers will only by a extra unit of a good or service if


the price falls…….......

 This leads to the law of demand


Law of demand

Workbooks page 109
Consumer Equilibrium
 Consumer equilibrium occurs when the satisfaction
from total spending by a consumer is maximised for
a given level of income

• Optimal purchase rule – a consumer will consume up to the point


where Price = $MU

• When buying many goods, a persons satisfaction is maximised when


the last dollar spent on each good gives the same amount of
satisfaction.

• Consumers are getting the most satisfaction from their total spending
and have maximised their total utility
Equi – Marginal Rule

Example Text Book Page 25
PARADOX OF VALUE
 It seems puzzling
Because we consume
that water, which is water in such large
essential for life, has a quantities, the MU is
low value, whereas low.
diamonds, which are
not essential have a Diamonds however are
very high value. consumed in small
amounts and so have a
very high MU.
Exercises page 110-111
QUESTIONS
DESCRIBE
 The trend for total utility as a person consumes
more and more of a product.
 The trend for marginal utility as a person
consumes more and more of a product.
 The trend for quantity demand as price falls.
 The trend for the consumption of an inferior good
as income increases.
 The trend for the consumption of a normal good as
income increases.
EXPLAIN
 Why consumers increase their quantity demand as
price falls.
Vocabulary
 Satisfaction from
consumption of a good or
service.
 As more of a good is
consumed, the extra
satisfaction decreases.
 The quantity a persons is
able and willing to buy at
a given price.
Vocabulary
 A consumer will
purchase up to the
point where MU=P
 A product used in
place of another.
 A product often used
in conjunction with
another.

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