MARGINAL UTILITY In relation to consumers!!!!!!. MARGINAL UTILITY Marginal = Extra Utility =...

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Transcript of MARGINAL UTILITY In relation to consumers!!!!!!. MARGINAL UTILITY Marginal = Extra Utility =...

  • Slide 1
  • MARGINAL UTILITY In relation to consumers!!!!!!
  • Slide 2
  • MARGINAL UTILITY Marginal = Extra Utility = Satisfaction
  • Slide 3
  • DIMINISHING MARGINAL UTILITY Lets test: If a consumer consumes 1 extra unit (marginal) of a good or service in succession what happens to their utility (satisfaction) after the consumption of that good.
  • Slide 4
  • Yum 10 out of 10 Ok 8 out of 10 Ghosty 6 out of 10 Yum 10 out of 10
  • Slide 5
  • DEFINING MARGINAL UTILITY As additional units of a G or S are consumed (consecutively) Total Utility increases at a decreasing rate. Or As additional units of a G or S are consumed (consecutively) Marginal Utility decreases. LAW OF MARGINAL UTILITY
  • Slide 6
  • CRITERIA LI: Understand and apply the Law of Diminishing Marginal Utility
  • Slide 7
  • REVISIT Yum 10 out of 10 Ok 8 out of 10 Ghosty 6 out of 10 Yum 10 out of 10
  • Slide 8
  • LAW OF MARGINAL UTILITY As additional units of a G or S are consumed (consecutively) Total Utility increases at a decreasing rate. Or As additional units of a G or S are consumed (consecutively) Marginal Utility decreases.
  • Slide 9
  • THE OPTIMUM PURCHASE RULE P = MU Consumers will/should continue to consume up to where Price is equal to Marginal Utility (P = MU) as they will maximise their total utility.
  • Slide 10
  • P = MU P falls to P P MU (P < MU) Incentive to consume more MU falls P = MU Therefore a demand curve is drawn downward sloping to the right (i.e. as price falls, quantity demanded will increase) THE OPTIMUM PURCHASE RULE P = MU
  • Slide 11
  • P = MU P rises to P P MU (P > MU) Incentive to consume less MU rises P = MU Therefore a demand curve is drawn downward sloping to the right (i.e. as price rises, quantity demanded will fall)
  • Slide 12
  • A rational consumer will consume successive units of a good until they reach the point where P = MU. At this point the price that they are paying for the additional unit matches the marginal utility that they are receiving. If P < MU then the consumer has an incentive to consume more because they are getting a bargain (i.e. receiving more marginal utility than they are paying for) If P > MU then the consumer has an incentive to consume less because they are getting ripped off ( i.e. receiving less marginal utility than they are paying for) THE OPTIMUM PURCHASE RULE P = MU
  • Slide 13
  • TABLE 1 Angela Agassis Utility Schedule for Tennis Balls Quantity Consumed (packs of three) Total utility ($) Marginal utility ($) 160 240 3120 45 Price ($)Quantity (3- packs) 70 40 20 Demand schedule for Ang Agassi 1.Fill in the missing gaps for Table 1 2.Complete the demand schedule for Ang Agassi 3.Graph Ang Agassis Demand Curve. 4.Explain why the demand curve slopes downward.
  • Slide 14
  • ANSWERS TABLE 1 Angela Agassis Utility Schedule for Tennis Balls Quantity Consumed (packs of three) Total utility ($) Marginal utility ($) 160 2 100 40 3120 20 4 125 5 Price ($)Quantity (3- packs) 70 0 40 2 20 3 Demand schedule for Ang Agassi
  • Slide 15
  • 4. If Angela is a rational consumer she will purchase packs of tennis balls, until she reaches the point where P=MU (optimal purchase rule). When the price of tennis balls falls, P