Bears and dogs are close cousins

Some are very close

Marginal utility

Why individual’s demand curves are often downward sloping.

Whatever that means.

Marginal utility and downward sloping demand curves.

Friedman, Microeconomics, chapter 6.

Where we are

The big picture• We get pleasure from things. But we get sated

and get less and less additional pleasure the more we already have. This is diminishing marginal utility.

• Because of this, we will buy more of anything only at ever decreasing price. Individual demand curves are downward sloping.

• In the orthodox model, aggregate demand curves are the sum of the individual curves. This requires an extreme assumption of independence of individual choice.

Marginal utility diminishes because of satiation

“Marginal utility” is the extra pleasure we get from consuming one more thing.

It diminishes because we become “sated” – we have had enough.

I could never tire of some things

Marginal Utility diminishesThe more you have, the less you want more.

The first time is GREAT!!!The second time is Wonderful!The third time is really good.The fourth time is nice.The fifth time . . . “I have a

headache”

Things are less exciting when you have a lot.

Even sex, drugs and rock and roll.

A graph of diminishing marginal utility

About here you barf

How much will you drink?

I hope not this much

Drink until MU = cost of wine

Drink whenever the MU is at least as great as the cost.

Don’t drink where MU is less than the cost

The Faux punchline: Demand curve is downward sloping

Your individual demand curve for wine is downward sloping

Buy where MU=price. Higher prices, higher MU, less wine. Lower prices, lower MU, more wine.

Careful: This does not mean that the community’s demand curve is downward sloping!

Not all products have diminishing marginal utility

Be careful of those that don’t; unless you like rehab.

If everyone acts the same in society as they would outside, then total

demand at any price would be the sum of individual demands

The orthodox idea:Assuming that everyone is alike,

and no one influences anyone else, the aggregate demand curve is the sum of individual demand curves

This way we need to know only one thing

How one person values things. The orthodox assume everyone else is the

same; and the total is the sum of all the individuals.

Aggregation works for sociopaths• Our consumption is

completely asocial; it is between us and a material good without any social interaction.

• We have perfect knowledge of what we are buying, or, at least, are not at all influenced by others. It works if

you live in a shell.

If these conditions do not hold, then aggregate demand curves may not

slope down

And raising prices may increase demand for a product.

That would be strange.Life is like that sometimes.

Robinson Crusoe’s life was strange

He lived all alone.But, at least his demand

curves sloped down.

P

Q

Robinson Crusoe’s demand for coconuts

How much would you pay for the third scoop of coconut ice cream?

1. Less than the first.2. The same as the first.3. More than the first because I found that I

really like it!4. Never had it; don’t know.

Here’s how you figure it out

You will pay up to the MU for that scoop.

MU is the change in total utility.The MU of the first is $15.The MU of the second is the

change, or $27-15= $12.The MU of the third is $36-27 =

$9.You will pay $9 for the third

scoop.

ScoopTotal pleasure

Marginal utility

1 $15 2 $27 3 $36 4 $42 5 $45 6 $45 7 $42 8 $36

Demand curve: how much you will buy at any price

At $15 you will buy only one scoop.At $12, the second scoop is a good buy.At $3, you’ll buy 5 scoops. (Maybe give one to the dog.)Your demand is the same as your MU.

How much will the community buy?

If there are 100 people, and you assume that they are all like you, then multiply the number of scoops at any price by 100!

You Community Price1 100 $15 2 200 $12 3 300 $9 4 400 $6 5 500 $3

Take-away points

• Marginal utility slopes down because of satiation.

• Individual demand curves slope down because of diminishing marginal utility.

• If we are not influenced by what others do, then aggregate demand curves are the sum of individual demand curves.