In 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 ID: 191852
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Slide1
Marginal Utility
In relation to consumers!!!!!!Slide2
Marginal Utility
Marginal = Extra
Utility = SatisfactionSlide3
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.Slide4
Yum 10 out of 10
Ok 8 out of 10
Ghosty
6 out of 10
Yum 10 out of 10Slide5
Defining Marginal Utility
As additional units of a G or S are consumed (consecutively) Total Utility
increases
at a
decreasing rate
.
Or
As additional units of a G or S are consumed (consecutively) Marginal Utility
decreases
.
Law of Marginal UtilitySlide6
Criteria
LI: Understand and apply the
Law of Diminishing Marginal UtilitySlide7
Revisit
Yum 10 out of 10
Ok 8 out of 10
Ghosty
6 out of 10
Yum 10 out of 10Slide8
Law of Marginal Utility
As additional units of a G or S are consumed (consecutively) Total Utility
increases
at a
decreasing rate
.
Or
As additional units of a G or S are consumed (consecutively) Marginal Utility
decreases
.Slide9
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.Slide10
P = MU
P falls to P
¹
P
¹
≠ 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 = MUSlide11
The Optimum purchase rule P = MU
P = MU
P rises to P
¹
P
¹
≠ MU (P¹ > MU)
Incentive to consume less
MU rises
P¹ = MUTherefore a demand curve is drawn downward sloping to the right (i.e. as price rises, quantity demanded will fall)Slide12
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 = MUSlide13
TABLE 1
Angela Agassi’s Utility Schedule for Tennis Balls
Quantity Consumed (packs of three)
Total utility ($)
Marginal utility ($)
1
60
2
40
3
120
4
5
Price ($)
Quantity (3-packs)
70
40
20
Demand schedule for
Ang
Agassi
Fill in the missing gaps for Table 1
Complete the demand schedule for
Ang
Agassi
Graph
Ang
Agassi’s Demand Curve.
Explain why the demand curve slopes downward.Slide14
Answers
TABLE 1
Angela Agassi’s Utility Schedule for Tennis Balls
Quantity Consumed (packs of three)
Total utility ($)
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
AgassiSlide15
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)Slide16
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 utilitySlide17
Quiz
(a) Define marginal utility.
Quantity Purchased
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
($)
Quantity
(DVD’S)
10
8
6
4Slide18
Answers
Quantity Purchased
Total Utility
Marginal Utility
(cents)
0
0
0
1
750
750
2
1 350
600
3
1 770
420
4
2 070
300
Price
($)
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
.
Or
As additional units of a G or S are consumed (consecutively) Marginal Utility
decreases
.Slide19
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 goodsSlide20
Example
Quantity
MUx
MUa
/Pa
MUy
MUb
/
Pb
1
55
20
2
35
163
15
144
36
Price of burgers ($5)
Price of chips ($2)
Formula
Equi
marginal rule
If
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
30.663Price of burgers ($5)Price of chips ($2)Slide21
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
50Slide22
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