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Principles of Economics 2nd edition by Fred M Gottheil PowerPoint Slides prepared by Ken Long ©1999 South-Western College Publishing 1 Chapter 5 Marginal Utility & Consumer Choice 5/23/2017 ©1999 South-Western College Publishing 2 This chapter discusses principles associated with The Law of Diminishing Total Measurement Consumer and Marginal Surplus of Utility Utility Marginal Utility ©1999 South-Western College Publishing 3 What is a Util? A hypothetical unit used to measure how much utility a person obtains from consuming a good ©1999 South-Western College Publishing 4 What is Utility? The satisfaction or enjoyment a person obtains from consuming a good ©1999 South-Western College Publishing 5 What is Marginal Utility? The change in total utility a person derives from consuming an additional unit of a good ©1999 South-Western College Publishing 6 What is Total Utility? The total number of utils a person derives from consuming a specific quantity of a good ©1999 South-Western College Publishing 7 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 ©1999 South-Western College Publishing 8 Does the Law of Diminishing Marginal Utility apply to all goods consumed? YES ©1999 South-Western College Publishing 9 What statement do these sites make about the marginal utility of diamonds? http://www.rostar.com http://www.usdiamond.com ©1999 South-Western College Publishing 10 Total Utility Quantity ©1999 South-Western College Publishing 1 11 1 Marginal Utility Quantity ©1999 South-Western College Publishing 1 12 2 What is a Demand Curve? A demand curve shows how many units will be demanded at various prices ©1999 South-Western College Publishing 13 Why do Demand Curves slope downward to the right? Because quantity demanded increases as price declines ©1999 South-Western College Publishing 14 Demand Curve P1 P2 Q1 Q2 ©1999 South-Western College Publishing D 15 15 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 ©1999 South-Western College Publishing 16 How many hot dogs will you buy? Up to the quantity that yields MU = P ©1999 South-Western College Publishing 17 Why? Because if MU > P you will buy another hot dog If MU < P you will not buy that last hot dog ©1999 South-Western College Publishing 18 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 ©1999 South-Western College Publishing 19 Why does MU = P explain the downward sloping demand curve? ©1999 South-Western College Publishing 20 MU = P1 P1 P2 MU = P2 Q1 Q2 ©1999 South-Western College Publishing 21 21 What is Consumer Surplus? The difference between the maximum amount that a consumer is willing to pay for something and what he actually pays ©1999 South-Western College Publishing 22 Consumer Surplus P Q ©1999 South-Western College Publishing 23 23 What happens to Consumer Surplus as Market Price changes? It increases when price falls and falls when prices increase ©1999 South-Western College Publishing 24 What is Interpersonal comparison of utility? A comparison of the marginal utility that different people derive from a good or a dollar ©1999 South-Western College Publishing 25 • 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? 26 END ©1999 South-Western College Publishing 27