Marginal Utility Approach

Group 4

Marginal Utility Approach

In economics, the marginal utility of a good or service is the gain from an increase, or loss from a decrease, in the consumption of that good or service.

Marginality Utility• Average amount of satisfaction gained from

consuming a good

• Total amount of satisfaction gained from consuming a good

• Addition satisfaction gained from consuming one more unit of a good

• Total amount of satisfaction gained from consuming a product divided by the number of goods consumed

• Total amount of satisfaction gained from consuming a good times the number of goods consumed

MarginalityThe term marginal refers to a small change

Frequently the marginal change is assumed to start from the endowment, meaning the total resources available for consumption

This endowment is determined by many things including physical laws (which constrain how forms of energy and matter may be transformed), accidents of nature (which determine the presence of natural resources), and the outcomes of past decisions made by the individual himself or herself and by others.

 it is often assumed in neoclassical analysis that goods and services are continuously divisible. Under this assumption, marginal concepts, including marginal utility, may be expressed in terms of differential calculus. Marginal utility can then be defined as the first derivative of the total satisfaction obtained from consumption of a good or service, with respect to the amount of consumption of that good or service.

Neoclassical economics is a set of approaches to economics focusing on the determination of prices, outputs, and incomedistributions in markets through supply and demand. This determination is often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by firms facing production costs and employing available information andfactors of production, in accordance with rational choice theory.[1]

Utility Theory

• Utility is want or pleasure satisfying characteristic of a good or service.

• Utility is measured in units of measurement called “utils”.

• Utility analysis is the investigation of how consumers reach decisions to achieve utility maximation.

• Utility is measured ordinally.

Total Utility

• Total Utility is the total amount of utility one derives from consuming goods or services.

• Total Utility decreases or diminishes overtime.

Economists, sometimes speak of a law of diminishing marginal utility, meaning that the first unit of consumption of a good or service yields more utility than the second and subsequent units, with a continuing reduction for greater amounts. The marginal decision rule states that a good or service should be consumed at a quantity at which the marginal utility is equal to the marginal cost.

What is meant by Marginal Utility?Marginal Utility is an economic concept because economics use it to determine how much of an item a consumer will buy.

Positive Marginal Utility is when the consumption of an additional item increases the total utility.

In Economics, the additional satisfaction or benefit (utility) that a consumer derives from buying an additional unit of a commodity or service.

Marginal Utility Calculation

Marginal Utility = No. of units of consumption

Total Utility

Marginal Utility = Changes in Total UtilityChange in No. of Units Consumed

Marginal Utility =

TU2 -- TU1C2 -- C1

Example of Utility

Macroeconomics

( from the Greek word prefix makro means “Large” and Economics )

Is a branch of economics dealing with the performance, structure, behavior and decision making of the economy as a whole, rather than individual markets.

2 areas of research that are emblematic of the discipline:

1.The attempt to understand the causes and consequences of short-run fluctuations in national income (the business cycle)

2.The attempt to understand the determinants of long-run economic growth (increases in national income)

Basic macroeconomics concepts: 1. Output and Income

- National output is the lowest amount of everything a country produces in a given time period. Everything that is produced and sold generates income. Therefore, output and income are usually considered equivalent and the two terms are often used infer changeably. GDP (Gross Domestic Product) one of the other national

accounts.2. Unemployment

- The amount of unemployment in an economy is measured by the unemployment rate, the percentage of workers without jobs in the Labor Force.

3. Inflation and deflation- A general price increase across

the entire economy is called Inflation.When prices decrease, there is Deflation.

Importance or uses of Macroeconomics in making Business Decision

1. To study the economy in totality.

2. To formulate the economic policies of the government.

3. To develop and expand the microeconomics.

4. To know the situation of the economy.

5. To gain knowledge on sectorial variables.

Microeconomics

( from the Greek words mikro means “small” )

A branch of economics that studies the behavior of individuals and firm in making decisions regarding the allocation of limited resources.

Importance of Microeconomics1.To understand the operation of an

economy2.To provide tools for economic

policies3.To examine the condition of

economic welfare4.Efficient utilization of resources5.Useful in international trade6.Useful in decision making:

Optimal resources allocationBasis for predictionLinear programmingPrice determinations

Example of Microeconomics

Individual Households

Business Firms

Industrial Activities

Microeconomics considers four categories:1.Economic profit – is made when a firm’s

average total costs is less that the price of each addition product at the profit maximizing output.

2.Normal profit – is one that occurs when a firms economic profit is zero.

3.Loss Minimizing Conditions – the price is between the average total cost and average variable cost at profit maximizing output.

4.Shutdown – the price is below average variable cost at the profit maximizing output.

Division of Economics

Production – Manufacturing process of goods to pride and satisfy the different needs of consumes. Utilization of products, good and services by the consumers in a given amount of time.

Distribution – the way the goods products and services are delivery to the consumers, as well as the way the products goods and services are allocated to the consumer through the different economic outlets.

Exchange – The way the products good and services are transferred to one person to another.

Public Finance – the way the government implement financial activities such as on Taxation on expand tunes and other else