Download 1999 South-Western College Publishing

Principles of Economics
2nd edition
by Fred M Gottheil
PowerPoint Slides prepared by Ken Long
©1999 South-Western College Publishing
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Chapter 5
Marginal Utility &
Consumer Choice
5/23/2017
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This chapter discusses
principles associated with
The Law of Diminishing
Total
Measurement
Consumer
and Marginal
Surplus
of Utility
Utility
Marginal Utility
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What is a Util?
A hypothetical unit used to
measure how much
utility a person obtains
from consuming a good
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What is Utility?
The satisfaction or
enjoyment a person
obtains from
consuming a good
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What is
Marginal Utility?
The change in total utility
a person derives from
consuming an additional
unit of a good
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What is Total Utility?
The total number of utils a
person derives from
consuming a specific
quantity of a good
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What is the
Law of Diminishing
Marginal Utility?
As more of a good is
consumed, the utility a
person derives from each
additional unit diminishes
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Does the Law of
Diminishing Marginal
Utility apply to all goods
consumed?
YES
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What statement do these sites
make about the marginal
utility of diamonds?
http://www.rostar.com
http://www.usdiamond.com
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Total Utility
Quantity
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Marginal Utility
Quantity
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What is a
Demand Curve?
A demand curve shows
how many units will be
demanded at various prices
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Why do Demand
Curves slope downward
to the right?
Because quantity
demanded increases as
price declines
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Demand Curve
P1
P2
Q1
Q2
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What is the
difference between
Wants and Demand?
We live in a world of
unlimited wants - but the
things that you demand
are those things you are
able and willing to buy
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How many hot dogs will
you buy?
Up to the quantity that yields
MU = P
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Why?
Because if MU > P you
will buy another hot dog
If MU < P you will not
buy that last hot dog
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When is your Total
Utility maximized?
When your budget is
completely spent and the
last dollar spent on each
good yields the same
marginal utility
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Why does
MU = P
explain the downward
sloping demand curve?
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MU = P1
P1
P2
MU = P2
Q1
Q2
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What is
Consumer Surplus?
The difference between
the maximum amount
that a consumer is willing
to pay for something and
what he actually pays
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Consumer Surplus
P
Q
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What happens to
Consumer Surplus as
Market Price changes?
It increases when price
falls and falls when
prices increase
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What is Interpersonal
comparison of utility?
A comparison of the
marginal utility that
different people derive
from a good or a dollar
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• What is a Util?
• What is Utility?
• What is Marginal Utility?
• What is Total Utility?
• What is the Law of Diminishing
Marginal Utility?
• What is a Demand Curve?
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END
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