This document discusses consumer choice and utility. It defines total utility as the total satisfaction a consumer gets from consuming a good, while marginal utility refers to the additional satisfaction from consuming one more unit of a good. The law of diminishing marginal utility states that as a consumer consumes more of a good, the additional utility they receive from each additional unit declines. This is because consuming more satisfies their wants up to a point, after which additional units provide less utility. The document illustrates this using graphs that show total utility increasing but marginal utility decreasing as consumption increases.
This document discusses consumer choice and utility. It defines total utility as the total satisfaction a consumer gets from consuming a good, while marginal utility refers to the additional satisfaction from consuming one more unit of a good. The law of diminishing marginal utility states that as a consumer consumes more of a good, the additional utility they receive from each additional unit declines. This is because consuming more satisfies their wants up to a point, after which additional units provide less utility. The document illustrates this using graphs that show total utility increasing but marginal utility decreasing as consumption increases.
This document discusses consumer choice and utility. It defines total utility as the total satisfaction a consumer gets from consuming a good, while marginal utility refers to the additional satisfaction from consuming one more unit of a good. The law of diminishing marginal utility states that as a consumer consumes more of a good, the additional utility they receive from each additional unit declines. This is because consuming more satisfies their wants up to a point, after which additional units provide less utility. The document illustrates this using graphs that show total utility increasing but marginal utility decreasing as consumption increases.
This document discusses consumer choice and utility. It defines total utility as the total satisfaction a consumer gets from consuming a good, while marginal utility refers to the additional satisfaction from consuming one more unit of a good. The law of diminishing marginal utility states that as a consumer consumes more of a good, the additional utility they receive from each additional unit declines. This is because consuming more satisfies their wants up to a point, after which additional units provide less utility. The document illustrates this using graphs that show total utility increasing but marginal utility decreasing as consumption increases.
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Consumer Choice and Utility
Basic Microeconomics A choice at the margin is a decision to do a little more or a little less of something. In exploring consumer choices, it’s important to differentiate between total utility and marginal utility. Goods and Services
Goods refer to anything that provides satisfaction to the
needs, wants, and desires of the consumer. like cars, books, clothes, etc.) that contribute directly (final goods) or indirectly (intermediate goods) to the satisfaction of human needs and wants.
Services are any intangible economic activities (such as
hairdressing, catering, insurance, banking, telecommunications, etc.), that likewise contribute directly or indirectly to the satisfaction of human wants. Essential or necessity goods are goods that satisfy the basic needs of man. These are goods that are necessary in our daily existence as human beings.
Luxury goods are those which men may do without, but which are used to contribute to his comfort and well being. (Ex. private jet, yacht, luxury cars, perfumes, jewelry, etc.)
Economic and free good
An economic good is that which is both useful and scarce. Water from our faucet is an economic good, because we are not utilizing it for free, we have to pay to its distributor. The air that we breathe and the sunlight coming from the sun are examples of free good. Utility (U) is a subjective notion in economics, referring to the amount of satisfaction a person gets from consumption of a certain item.
Marginal utility (MU) refers to the extra utility a consumer
gets from one additional unit of a specific product. - Marginal means ‘additional’ or ‘extra’. In economics, we use marginal analysis in the examination of the effects of adding one extra unit to, or taking away one unit from, some economic variable
In a short period of time, the marginal utility (MU) derived
from successive units of a given product will decline. This is known as diminishing marginal utility.
5 The Law of diminishing marginal utility This is a second explanation of the downward sloping demand curve.
Although consumer wants in general are insatiable, wants
for specific commodities can be fulfilled.
• The more of a specific product that consumers obtain, the
less they will desire more units of that product.
6 TOTAL AND MARGINAL UTILITY Tacos Total Marginal Tacos 30 consumed Utility, Utility, consumed
Total Utility (utils)
per meal Utils Utils per meal 20 0 0 1 10 10
0 1 2 3 4 5 6 7
IMPORTANT: Units consumed per meal
Marginal Utility (utils)
10 Take note of the graph above which is 8 the Total Utility which depicts the 6 4 total utility curve and the graph below 2 Which is the Marginal Utility which 0 depicts the marginal utility curve. -2 1 2 3 4 5 6 7 Units consumed per meal TOTAL AND MARGINAL UTILITY Tacos Total Marginal consumed Utility, Utility, 30
Total Utility (utils)
per meal Utils Utils 20 0 0 10 1 10 10
0 1 2 3 4 5 6 7
Units consumed per meal
Marginal Utility (utils)
10 8 6 4 2 0 -2 1 2 3 4 5 6 7 Units consumed per meal TOTAL AND MARGINAL UTILITY Tacos Total Marginal consumed Utility, Utility, 30
Total Utility (utils)
per meal Utils Utils 20 0 0 10 1 10 10
8 2 18 0 1 2 3 4 5 6 7
Units consumed per meal
Marginal Utility (utils)
10 8 6 4 2 0 -2 1 2 3 4 5 6 7 Units consumed per meal 9 TOTAL AND MARGINAL UTILITY Tacos Total Marginal consumed Utility, Utility, 30
Total Utility (utils)
per meal Utils Utils 20 0 0 10 1 10 10
8 2 18 6 3 24 0 1 2 3 4 5 6 7
Units consumed per meal
Marginal Utility (utils)
10 8 6 4 2 0 -2 1 2 3 4 5 6 7 Units consumed per meal 10 TOTAL AND MARGINAL UTILITY Tacos Total Marginal consumed Utility, Utility, 30
Total Utility (utils)
per meal Utils Utils 20 0 0 10 1 10 10
8 2 18 6 3 24 0 1 2 3 4 5 6 7
4 4 28 Units consumed per meal
Marginal Utility (utils)
10 8 6 4 2 0 -2 1 2 3 4 5 6 7 Units consumed per meal 11 TOTAL AND MARGINAL UTILITY Tacos Total Marginal consumed Utility, Utility, 30
Total Utility (utils)
per meal Utils Utils 20 0 0 10 1 10 10
8 2 18 6 3 24 0 1 2 3 4 5 6 7
4 4 28 Units consumed per meal
Marginal Utility (utils)
10 2 8 5 30 6 4 2 0 -2 1 2 3 4 5 6 7 Units consumed per meal 12 TOTAL AND MARGINAL UTILITY Tacos Total Marginal consumed Utility, Utility, 30
Total Utility (utils)
per meal Utils Utils 20 0 0 10 1 10 10
8 2 18 6 3 24 0 1 2 3 4 5 6 7
4 4 28 Units consumed per meal
Marginal Utility (utils)
10 2 8 5 30 6 0 4 6 30 2 0 -2 1 2 3 4 5 6 7 Units consumed per meal 13 TOTAL AND MARGINAL UTILITY Tacos Total Marginal TU consumed Utility, Utility, 30
Total Utility (utils)
per meal Utils Utils 20 0 0 10 1 10 10
8 2 18 6 3 24 0 1 2 3 4 5 6 7
4 4 28 Units consumed per meal
Marginal Utility (utils)
10 2 8 5 30 6 0 4 6 30 2 -2 0 MU 7 28 -2 1 2 3 4 5 6 7 Units consumed per meal 14 TOTAL AND MARGINAL UTILITY Tacos Total Marginal TU consumed Utility, Utility, 30
Total Utility (utils)
per meal Utils Utils
0 0 20 Observe 10 Diminishing 1 10 10
8 2 18 Marginal 6 3 24 0 1 2 Utility 3 4 5 6 7
4 4 28 Units consumed per meal
Marginal Utility (utils)
10 2 8 5 30 6 0 4 6 30 2 -2 0 MU 7 28 -2 1 2 3 4 5 6 7 Units consumed per meal 15 a. Total utility increases as each additional taco is purchased through the first five; but utility rises at a diminishing rate since each taco adds less and less to the consumer’s satisfaction.
b. At some point, marginal utility becomes zero and
then even negative at the seventh unit and beyond.
If more than six tacos were purchased, total utility
would begin to fall. This illustrates the law of diminishing marginal utility.
16 Marginal utility is also related to the elasticity of demand. If demand is inelastic, then the quantity demanded drops off slowly as the price increases, indicating that the marginal utility of the product or service is high; If demand is elastic demand, demand quantity drops off sharply, indicating a low marginal utility for the product, so the consumer is not willing to pay a higher price. Budget Constraint and Indifference curves
Consumer choice is guided by preferences for specific products, budget
constraints, prices, and the marginal utility of products. A budget constraint exists because the consumer only has so much money, so only so much can be spent; therefore, even among desirable things, a choice must be made. An indifference curve shows the different combinations of the two goods that yield the same level of utility, independent of the price of the goods. Due to the law of diminishing marginal utility, the indifference curve between the two goods is convex to the origin. All combinations of the two goods (pizza and shakes) that are on the indifference curve (A, B, and C) yield the same level of utility, say Utility = 100. Having more of good, yields a higher level of utility (combination D) and having less of the goods yields a lower level of utility (combination E). Budget Line
Any point within the budget line is feasible
Below the budget line would be feasible but not optim Above the budget line is not feasible
By connecting these two extremes, you can find every combination that Jill can afford along her budget line. For example, at point R, Jill buys 2 T-shirts and 4 movies. This costs her: T-Shirts @ $14 x 2 = $28 Movies @ $7 x 4 = $28 Total = $24 + $28 = $56 This point indeed exhausts Jill’s budget. Equimarginal Principle It is otherwise known as the “equal marginal principle” or the “principle of maximum satisfaction.” The equimarginal principle states that consumers choose combinations of various goods in order to achieve maximum total utility. It explains the way in which each consumer will spend portions of their income across a variety of different goods in such a way as to maximize their overall satisfaction. The ideal quantity of goods to maximize utility would be 4 pairs. With a quantity of 4, 16/$1 is equal to 16/$1 The Theory of Consumer choice SELF HELP VIDEO - https://www.youtube.com/watch?v=2IGjSiXWedQ
Questions: 1. How does optimization happen in consumer choices 2. Present graphically the effect of an increase in income to the budget constraint. Explain. What about the effects of a price change? Present graphically also and explain.
Due= Friday, Sept 24, BB upload, For discussion.
Quiz = Sat, Sept 25 (elasticity, consumer choice slides) Reference Avila-Bato, Viray et al Microeconomics Simplified Pressbooks: Microeconomics
