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6.0) Week 6 Agenda�6.1) Utility�6.2) Total Utility vs. Marginal Utility�6.3) The Law of Diminishing Marginal Utility �6.4) Utility Maximization�6.5) Practice

Ch6. Consumer Choice and Demand

ECO 1002. Principles of Microeconomics

Week 6

Dr. Christopher Paik

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6.1) Consumer Utility

What is utility?

Each good we purchase provides with us some value (______)

Economists call this utility and, it is measured in ______

It’s a way of measuring ______

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6.1) Consumer Utility

What is marginal utility?

The increase in satisfaction from purchasing an additional unit of a good is its ________

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6.2) Total Utility vs. Marginal Utility

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6.2) Total Utility vs. Marginal Utility

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6.2) Total Utility vs. Marginal Utility

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6.3) The Law of Diminishing Marginal Utility

As you continue to consume a given good, you will get less additional satisfaction from each unit consumed

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6.4) Utility Maximization

Using Marginal Utility

Q. How do consumers maximize their utility?

Marginal utility is the key to answering this question!

MU = P (benefit = cost), let’s say P = $11

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6.4) Consumer’s Optimal Choice: Utility Maximization

$ 11

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$ 11

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Image: dreamstime

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6.4) Utility Maximization

If MU > P, you still have more potential satisfaction to gain by consuming more goods and services

If MU < P, you overspend for the good or service since your satisfaction from an additional unit is less than what you paid for it

To maximize your utility, MU should be equal to the price of a good.

In the pizza example, the unit of pizza is an integer. In other words, there is no decimal.

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6.4) Utility Maximization

Q. How do individuals maximize their total utility from consuming various combinations of goods and services?

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6.4) Utility Maximization

Your weekly budget is $50, a slice of pizza is $10, and wall climbing is $10 for every half hour.

In order to find the combination that maximizes the utility, we need to find each quantity where the marginal utility per price is equal for other product. Here, we can see marginal utility per price for pizza goes 7, 6, 5, 4, 3 and marginal utility for the wall climbing goes 9, 8, 6, 3, 1. We can find 6 for both marginal utility per price for pizza and wall climbing. Again, the reason why we are interested in point where the marginal utility per prices are the same because prices for products are vary, so we want to find the same satisfaction where each dollar you spend for. Here, marginal utility per price for 2 pizzas and an hour and half of wall climbing marginal utility per price are the same, which are 6.

#13. Lastly, we need to verify that having 2 pizzas and doing 1.5 hours of doing wall climbing don’t exceed the given budget we have. We have the weekly budget for $50. Then, let’s see, consuming 2 pizzas will cost $20 and doing 3 units of wall climbing which are one hour and 30 minutes will cost $30. $20 plus $30 is $50, and it doesn’t exceed the budget, in fact, it is great because we are spending all without savings. You might be saying “Hey, Chris, is it better to save instead of spending all?” You are right, but in this chapter, we are only considering about short-term period for consumer choice. If you take more intermediate level, we learn more detail about consumer choice where they can also save. They consider about uncertainty of economic outlook, risk levels, and other factors to see how consumers make choices. It gets more and more interesting. However, since this class is a principle level, we want to keep the subject as simple as possible. So back to the question, basically, if you do not spend your weekly budget, it goes away. So, you want to spend all of your budget to get the most out of it. Then, how much total utility can we get from this utility maximization? We have 130 total utility from getting two pizzas and 230 from an hour and 30 minutes of doing wall climbing. Then total we have 560 of total utility. By making this choice you can maximize your utility under $50 of weekly budget. Again, it was simple math calculation process, but it could be confusing, so do not hesitate to shoot me an email if you want to go over again.

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6.4) Utility Maximization

Your weekly budget is $50, a slice of pizza is $10, and wall climbing is $10 for every half hour.

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6.4) Utility Maximization

Your weekly budget is $50, a slice of pizza is $10, and wall climbing is $10 for every half hour.

2 pizzas and 1.5 hours (3 units) wall climbing = (2 x $10) + (3 x $10) = $50

TU: 130 from pizzas and 230 from wall climbing = 130 + 230 = 360

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