Download UTILITY and DEMAND

UTILITY
 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
one more unit of a
good.
M
U
$
 The law of diminishing
marginal utility states
that as we consume
more of the same
good MU will begin to
fall.
units
Example
 Sam loves cream donuts. The first donut he eats gives him 18 utils of
satisfaction. The second donut gives him 12 utils of satisfaction. The third
donut gives him 7 utils of satisfaction and the fourth donut gives him 1
util .
 Copy and complete the table below then draw Sam's total and
marginal utility graphs
Number of
Donuts
Marginal
Utility (extra
satisfaction)
Total Utility
from all
Donuts
consumed
Total and
marginal
Utility
1
2
3
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
q1
Q
Q
q1
MU
Putting a $ Value on Utility
 A person can put a dollar value on personal satisfaction
from consuming an item.
 This value will be different for each person based on
their personal preferences (i.e. Sam really likes cream
donuts so may put on a higher dollar value on cream
donuts than his workmate.
Example –
Sam values each util at 50cents
Complete the final column in the table below
Quantity
Marginal Utility
1
18
2
12
3
7
4
1
Marginal Utility in dollars
(each util is worth .50)
9
6
3.50
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.
 A consumer will only
buy extra units if their
value of personal
satisfaction from the
extra unit is above or
equal to the price they
have to pay.
Using the Optimal Purchase Rule to
find a persons Demand for a good or
service
 A persons demand for a good or service can be
defined as
 The amount of a good or service that a person is willing
and able to buy at each price level
 Marginal Utility will determine a person’s demand for a
good or service.
 An individual demand curve is the same as their
marginal utility (dollars) curve.
Illustration Exercise
 Complete the worksheet
and stick into your notes
DEMAND
 Using P=MU and a
consumers MU curve we
can derive their demand.
Mu
$
P
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
 Earlier units of consumption have a higher marginal
utility therefore consumers are willing to pay a higher
price
 Consumers will only by a extra unit of a good or service if
the price falls…….......
 This leads to the law of demand
Law of demand

Workbooks page 109
Consumer Equilibrium
 Consumer equilibrium occurs when the satisfaction
from total spending by a consumer is maximised for
a given level of income
• Optimal purchase rule – a consumer will consume up to the point
where Price = $MU
•
When buying many goods, a persons satisfaction is maximised when
the last dollar spent on each good gives the same amount of
satisfaction.
• 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
that water, which is
essential for life, has a
low value, whereas
diamonds, which are
not essential have a
very high value.
Because we consume
water in such large
quantities, the MU is
low.
Diamonds however are
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.