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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. $
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.
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.
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
• 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.