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MARGINAL UTILITYIn relation to consumers!!!!!!
MARGINAL UTILITY
•Marginal = Extra
•Utility = Satisfaction
DIMINISHING MARGINAL UTILITY
•Lets test:• If a consumer consumes 1 extra unit (marginal) of a good or service in succession what happens to their utility (satisfaction) after the consumption of that good.
Yum 10 out of 10
Ok 8 out of 10
Ghosty 6 out of 10
Yum 10 out of 10
DEFINING MARGINAL UTILITY
As additional units of a G or S are consumed (consecutively) Total Utility increases at a decreasing rate.
OrAs additional units of a G or S are consumed (consecutively) Marginal Utility decreases.
LAW OF MARGINAL UTILITY
CRITERIA
• LI: Understand and apply the Law of Diminishing Marginal Utility
REVISIT
Yum 10 out of 10
Ok 8 out of 10
Ghosty 6 out of 10
Yum 10 out of 10
LAW OF MARGINAL UTILITY
As additional units of a G or S are consumed (consecutively) Total Utility increases at a decreasing rate.
OrAs additional units of a G or S are consumed (consecutively) Marginal Utility decreases.
THE OPTIMUM PURCHASE RULE P = MU
• Consumers will/should continue to consume up to where Price is equal to Marginal Utility (P = MU) as they will maximise their total utility.
• P = MU• P falls to P¹• P¹ ≠ MU (P¹ < MU)• Incentive to consume more• MU falls• P¹ = MU• Therefore a demand curve is drawn downward sloping to the right (i.e. as price falls, quantity demanded will increase)
THE OPTIMUM PURCHASE RULE P = MU
THE OPTIMUM PURCHASE RULE P = MU• P = MU
• P rises to P¹• P¹ ≠ MU (P¹ > MU)• Incentive to consume less• MU rises • P¹ = MU• Therefore a demand curve is drawn downward sloping to the right (i.e. as price rises, quantity demanded will fall)
A rational consumer will consume successive units of a good until they reach the point where P = MU. At this point the price that they are paying for the additional unit matches the marginal utility that they are receiving.
If P < MU then the consumer has an incentive to consume more because they are ‘getting a bargain’ (i.e. receiving more marginal utility than they are paying for)
If P > MU then the consumer has an incentive to consume less because they are ‘getting ripped off’ ( i.e. receiving less marginal utility than they are paying for)
THE OPTIMUM PURCHASE RULE P = MU
TABLE 1 Angela Agassi’s Utility Schedule for
Tennis BallsQuantity
Consumed (packs of
three)
Total utility ($)
Marginal utility ($)
1 60 2 40 3 120 4 5
Price ($) Quantity (3-packs)
70
40
20
Demand schedule for Ang Agassi
1. Fill in the missing gaps for Table 1
2. Complete the demand schedule for Ang Agassi
3. Graph Ang Agassi’s Demand Curve.
4. Explain why the demand curve slopes downward.
ANSWERS
TABLE 1 Angela Agassi’s Utility Schedule for
Tennis BallsQuantity
Consumed (packs of
three)
Total utility ($)
Marginal utility ($)
1 60 60
2 100 40 3 120 20
4 125 5
Price ($) Quantity (3-packs)
70 0
40 2
20 3
Demand schedule for Ang Agassi
4.
If Angela is a rational consumer she will purchase packs of tennis balls, until she reaches the point where P=MU (optimal purchase rule).
When the price of tennis balls falls, P<MU.
Because P<MU, there is an incentive for Angela to increase her consumption of tennis balls. As she consumes additional units, MU will fall.
Therefore a demand curve is drawn downward sloping to the right (i.e. as price falls, quantity demanded will increase)
CRITERIA
• LI: Understand and apply the Law of Diminishing Marginal Utility.
• Use the Law of Diminishing Marginal Utility to describe the demand curve
• Use Equal marginal rule to calculate the optimum amount of a good or service a consumer should consume to maximise his/her utility
QUIZ• (a) Define marginal utility.
Quantity Purchase
d
Total Utility
Marginal Utility(cents)
0 0
1 750
2 600
3 1 770
4 300
(d) Use the law of diminishing marginal utility to explain why Sam’s demand curve for DVDs will slope downward to the right.
Price
($)
Quantity
(DVD’S)
10
8
6
4
ANSWERS
Quantity Purchase
d
Total Utility
Marginal Utility(cents)
0 0 0
1 750 750
2 1 350 600
3 1 770 420
4 2 070 300
Price
($)
Quantity
(DVD’S)
10 0
8 0
6 2
4 3
The law of diminishing marginal utility states that as more of a good or service is consumed successively marginal utility falls.
A rational consumer will only increase consumption if P=MU.
As consumption increases from 1 to 2 goods MU falls from 750 to 600. The consumer will only purchase additional units if the price is lowered to where P=MU.
Therefore a demand curve is drawn downward sloping to the right
As additional units of a G or S are consumed (consecutively) Total Utility increases at a decreasing rate.
OrAs additional units of a G or S are consumed (consecutively) Marginal Utility decreases.
THE LAW OF EQUAL MARGINAL UTILITY AND CONSUMER EQUILIBRIUM
How can a consumer maximise his Utility on the next dollar spent.
What combination of goods/service is going to give the highest amount of utility.
INFORMATION WE HAVE:
Budget (fixed amount of money)
MU of both goods
Price of both goods
EXAMPLE
Quantity
MUx MUa/Pa MUy MUb/Pb
1 55 20
2 35 16
3 15 14
4 3 6
Price of burgers ($5) Price of chips ($2)
𝑀𝑈𝑎𝑃𝑎
=𝑀𝑈𝑏𝑃𝑏
FormulaEqui marginal
ruleIf Jimbo had $11 to spend, what combination of chips and burgers he should buy to maximise his utility.
Quantity
MUx MUa/Pa MUy MUb/Pb
1 55 11 20 10
2 35 7 16 8
3 15 3 14 7
4 3 0.6 6 3
Price of burgers ($5) Price of chips ($2)
QUICK QUIZ
• Jack and Jill both earn $10 pocket money. They spend all $10 on chips and lollies. Jill purchases six packets of chips and two packets of lollies.
• Use table 1 to determine the quantity of chips and lollies Jack should purchase to maximise his total utility.
• A packet of chips costs $1 and a packet of lollies costs $2.
Quantity of
chips
(packet)
Marginal
utility (utils)
MUa/MUb
chips
Quantity of
lollies
(packet)
Marginal
utility (utils)
MUa/MUb
lollies
1 400 1 400
2 350 2 300
3 250 3 200
4 100 4 100
5 50 5 50
ANSWER
Quantity of
chips
(packet)
Marginal
utility (utils)
MUa/Pa
chips
Quantity of
lollies
(packet)
Marginal
utility (utils)
MUa/Pa
lollies
1 400 400 1 400 200
2 350 350 2 300 150
3 250 250 3 200 100
4 100 100 4 100 50
5 50 50 5 50 25
4 packets of chips
3 packets of lollies