Total Utility and Marginal Utility

Total Utility and Marginal UtilityTotal Utility and Marginal Utility

What is utility?What is utility?

• Utility of a consumer is a measure of the Utility of a consumer is a measure of the satisfaction the consumer derives from satisfaction the consumer derives from consumption of goods and servicesconsumption of goods and services

• Each individual’s utility depends on Each individual’s utility depends on everything that a person consumeseverything that a person consumes

• Consumption bundle – is the collection Consumption bundle – is the collection of all the goods and services consumed of all the goods and services consumed by that individualby that individual

Utility and ConsumptionUtility and Consumption

• Consumption bundle – is the collection of all Consumption bundle – is the collection of all the goods and services consumed by that the goods and services consumed by that individualindividual

• Utility function – gives the total utility Utility function – gives the total utility generated by his or her consumption bundlegenerated by his or her consumption bundle

• Remember….people must make choices and Remember….people must make choices and they usually base them on at least one rough they usually base them on at least one rough attempt to decide which choice will given attempt to decide which choice will given them greater satisfactionthem greater satisfaction

Measuring UtilityMeasuring Utility

• Measured in hypothetical units called utilsMeasured in hypothetical units called utils

Diminishing Marginal UtilityDiminishing Marginal Utility

• What is marginal utility?What is marginal utility?– The change in total utility generated by The change in total utility generated by

consuming one additional unit of that good or consuming one additional unit of that good or serviceservice

• The marginal utility curve shows how The marginal utility curve shows how marginal utility depends on the quantity of a marginal utility depends on the quantity of a good or service consumedgood or service consumed– The marginal utility curve is constructed by The marginal utility curve is constructed by

plotting points at the midpoint of the unit plotting points at the midpoint of the unit intervalsintervals

Diminishing Marginal UtilityDiminishing Marginal Utility• Slopes downward due to diminishing Slopes downward due to diminishing

marginal utility—each additional clam gives marginal utility—each additional clam gives Cassie less utility than the previous clamCassie less utility than the previous clam


• Not all marginal utility curves eventually Not all marginal utility curves eventually become negativebecome negative

• Generally accepted that marginal utility Generally accepted that marginal utility curves do slope downward – curves do slope downward – consumption of most goods and consumption of most goods and services is subject to diminishing services is subject to diminishing marginal utilitymarginal utility


• The principle of diminishing marginal utility The principle of diminishing marginal utility says that each successive unit of a good or says that each successive unit of a good or service consumed adds less to total utility service consumed adds less to total utility than the previous unitthan the previous unit

• The more of a good or service you consume, The more of a good or service you consume, the closer you are to being satisfied – the closer you are to being satisfied – reaching a point at which an additional unit reaching a point at which an additional unit of the good adds nothing to your satisfactionof the good adds nothing to your satisfaction

Budget Constraints & Budget LinesBudget Constraints & Budget Lines• The principle of diminishing marginal utility is The principle of diminishing marginal utility is

able to explain why most people eventually able to explain why most people eventually reach a limitreach a limit

• It costs some additional resources to consume It costs some additional resources to consume more of a good, and consumers must take that more of a good, and consumers must take that cost into account when making choicescost into account when making choices

• The fundamental measure of a cost is The fundamental measure of a cost is opportunity costopportunity cost

• The amount of money a consumer can spend is The amount of money a consumer can spend is limited, a decision to consume more of a good is limited, a decision to consume more of a good is also a decision to come less of some other goodalso a decision to come less of some other good

Budget Constraints & Budget LinesBudget Constraints & Budget Lines• Sammy loves clams and potatoes but he has Sammy loves clams and potatoes but he has

a weekly income of $20 and since, given his a weekly income of $20 and since, given his appetite, more of either good is better than appetite, more of either good is better than less, he spends it all on clams and potatoesless, he spends it all on clams and potatoes

• If clams cost $4 per pound and potatoes cost If clams cost $4 per pound and potatoes cost $2 per pound$2 per pound

• What are his possible choices????What are his possible choices????

• What are his limits????What are his limits????

Budget Constraints & Budget LinesBudget Constraints & Budget Lines

• Whatever he chooses, we know that the Whatever he chooses, we know that the cost of his consumption bundle can not cost of his consumption bundle can not exceed the amount of money that he exceed the amount of money that he has to spendhas to spend.

Expenditure on clams + Expenditure on potatoes Expenditure on clams + Expenditure on potatoes ≥ Total income≥ Total income

Budget Constraints & Budget LinesBudget Constraints & Budget Lines• Consumers have limited income and this Consumers have limited income and this

limits how much they can consume.limits how much they can consume.• With the equation – a consumer might With the equation – a consumer might

choose a consumption bundle that costs choose a consumption bundle that costs no more than his or her incomeno more than his or her income

• Budget Constraint – requires that the Budget Constraint – requires that the cost of a consumer’s consumption cost of a consumer’s consumption bundle be no more than the consumer’s bundle be no more than the consumer’s incomeincome

Budget Constraints & Budget LinesBudget Constraints & Budget Lines• Sammy’s consumption bundles are his Sammy’s consumption bundles are his

consumption possibilitiesconsumption possibilities• The set of all consumption bundles that can The set of all consumption bundles that can

be consumed given the consumer’s income be consumed given the consumer’s income and prevailing pricesand prevailing prices

• Remember – whether or not a particular Remember – whether or not a particular consumption bundle is included in a consumption bundle is included in a consumer’s consumption possibilities consumer’s consumption possibilities depends on the consumer’s income and the depends on the consumer’s income and the prices of goods and servicesprices of goods and services

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Affordable Affordable consumptioconsumption bundles n bundles

that cost all that cost all of Sammy's of Sammy's

incomeincome

Sammy’s Budget Line, BL

Affordable Affordable consumpticonsumpti

on on bundlesbundles

Unaffordable Unaffordable consumption consumption

bundlesbundles

Quantity of clams (pounds)

Quantity of potatoes (pounds)

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Consumption bundle

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clams(pounds)

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Sammy’s Consumption PossibilitiesSammy’s Consumption PossibilitiesDoes Point C represent Sammy’s budget constraint?Does Point C represent Sammy’s budget constraint?

Expenditure on clams + Expenditure on potatoes ≥ Total Expenditure on clams + Expenditure on potatoes ≥ Total incomeincome

6 pounds of potatoes x $2 per pound + 2 pounds of clams x $4 per pound 6 pounds of potatoes x $2 per pound + 2 pounds of clams x $4 per pound

$12$12 + $8 + $8 = $20= $20


• Budget line show the consumption Budget line show the consumption bundles available to a consumer who bundles available to a consumer who spends all of his or her income spends all of his or her income

• Sammy’s is downward sloping because Sammy’s is downward sloping because he is consuming all of his incomehe is consuming all of his income

Consumption ChoiceConsumption Choice

• Sammy has a budget constraint which means Sammy has a budget constraint which means he will consume a consumption bundle on he will consume a consumption bundle on the budget line – a choice to consume a given the budget line – a choice to consume a given quantity of claims also determines his potato quantity of claims also determines his potato consumptionconsumption

• How do we find the consumption bundle that How do we find the consumption bundle that maximizes Sammy’s total utility?maximizes Sammy’s total utility?

Finding his optimal consumption bundle!Finding his optimal consumption bundle!

Consumption ChoiceConsumption Choice• Sammy’s optimal consumption bundle is the Sammy’s optimal consumption bundle is the

consumption bundle that maximizes the consumption bundle that maximizes the consumer’s total utility given his or her consumer’s total utility given his or her budget constraintbudget constraint

• The utility of Sammy’s choices is shown The utility of Sammy’s choices is shown below. The more Sammy consumer of either below. The more Sammy consumer of either good, the higher his utility is.good, the higher his utility is.

• Due to his limited budget, he has to make a Due to his limited budget, he has to make a trade-offtrade-off


• The more pounds of clams he consumes, the The more pounds of clams he consumes, the fewer potatoes, etc.fewer potatoes, etc.

• He must choose a point on his budget lineHe must choose a point on his budget line

Sammy’s Budget and Total UtilitySammy’s Budget and Total Utility

Sammy’s total utility is the sum of the utility he gets from clams and the utility he gets from potatoes.

Quantity of potatoes (pounds)Quantity of potatoes (pounds)

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Utility function

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Quantity of clams (pounds)Quantity of clams (pounds)0246810

(a) Sammy’s Budget Line

(b) Sammy’s Utility Function

The optimal The optimal consumption consumption

bundle…bundle…



… … maximizes total utility maximizes total utility given the budget constraintgiven the budget constraint

Total utility (utils)

Optimal Consumption BundleOptimal Consumption Bundle

Sammy’s total utility is Sammy’s total utility is maximized at bundle maximized at bundle CC, , where he consumes 2 where he consumes 2 pounds of clams and 6 pounds of clams and 6

pounds of potatoes. This is pounds of potatoes. This is Sammy’s Sammy’s optimal optimal

consumption bundleconsumption bundle..

Total Utility and Total Utility and Marginal Utility NotesMarginal Utility Notes

What is utility?What is utility?

• Utility of a consumer is a measure of the Utility of a consumer is a measure of the satisfaction the consumer derives from satisfaction the consumer derives from consumption of goods and servicesconsumption of goods and services

• Each individual’s utility depends on Each individual’s utility depends on everything that a person consumeseverything that a person consumes

• Consumption bundle – is the collection of all Consumption bundle – is the collection of all the goods and services consumed by that the goods and services consumed by that individualindividual

Utility and ConsumptionUtility and Consumption

• Utility function – Utility function –

• Remember….people must make choices and Remember….people must make choices and they usually base them on at least one rough they usually base them on at least one rough attempt to decide which choice will given attempt to decide which choice will given them greater satisfactionthem greater satisfaction

Measuring UtilityMeasuring Utility


• What is marginal utility?What is marginal utility?

• The marginal utility curve shows how The marginal utility curve shows how marginal utility depends on the quantity of a marginal utility depends on the quantity of a good or service consumedgood or service consumed


• Not all marginal utility curves eventually Not all marginal utility curves eventually become negativebecome negative

• Generally accepted that marginal utility Generally accepted that marginal utility curves do slope downward – consumption of curves do slope downward – consumption of most goods and services is subject to most goods and services is subject to diminishing marginal utilitydiminishing marginal utility


• The principle of diminishing marginal utility The principle of diminishing marginal utility says says

• The more of a good or service you consume, The more of a good or service you consume, the closer you are to being satisfied – the closer you are to being satisfied –


• The principle of diminishing marginal utility is The principle of diminishing marginal utility is able to explain why most people eventually able to explain why most people eventually reach a limitreach a limit

• It costs some additional resources to consume It costs some additional resources to consume more of a good, and consumers must take that more of a good, and consumers must take that cost into account when making choicescost into account when making choices

• The fundamental measure of a cost is The fundamental measure of a cost is ________________________________________

• The amount of money a consumer can spend is The amount of money a consumer can spend is limited, a decision to consume more of a good is limited, a decision to consume more of a good is also a decision to come less of some other goodalso a decision to come less of some other good


• Sammy loves clams and potatoes but he has Sammy loves clams and potatoes but he has a weekly income of $20 and since, given his a weekly income of $20 and since, given his appetite, more of either good is better than appetite, more of either good is better than less, he spends it all on clams and potatoesless, he spends it all on clams and potatoes

• If clams cost $4 per pound and potatoes cost If clams cost $4 per pound and potatoes cost $2 per pound$2 per pound

• What are his possible choices????What are his possible choices????

• What are his limits????What are his limits????


• Whatever he chooses, we know that the cost Whatever he chooses, we know that the cost of his consumption bundle can not exceed of his consumption bundle can not exceed the amount of money that he has to spendthe amount of money that he has to spend.


• Consumers have limited income and this Consumers have limited income and this limits how much they can consume.limits how much they can consume.

• With the equation – a consumer might With the equation – a consumer might choose a consumption bundle that costs no choose a consumption bundle that costs no more than his or her incomemore than his or her income

• Budget Constraint – Budget Constraint –


• Sammy’s consumption bundles are his Sammy’s consumption bundles are his consumption possibilitiesconsumption possibilities

• The set of all consumption bundles that can The set of all consumption bundles that can be consumed given the consumer’s income be consumed given the consumer’s income and prevailing pricesand prevailing prices

• Remember – Remember –

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Affordable Affordable consumptioconsumption bundles n bundles

that cost all that cost all of Sammy's of Sammy's

incomeincome

Sammy’s Budget Line, BL

Affordable Affordable consumpticonsumpti

on on bundlesbundles

Unaffordable Unaffordable consumption consumption

bundlesbundles



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Consumption bundle

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Quantity of

clams(pounds)

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Quantity of potatoes(pounds)

Sammy’s Consumption PossibilitiesSammy’s Consumption Possibilities


• Budget line show the consumption bundles Budget line show the consumption bundles available to a consumer who spends all of his available to a consumer who spends all of his or her income or her income

• Sammy’s is downward sloping becauseSammy’s is downward sloping because


• Sammy has a budget constraint which means Sammy has a budget constraint which means he will consume a consumption bundle on he will consume a consumption bundle on the budget line – a choice to consume a given the budget line – a choice to consume a given quantity of claims also determines his potato quantity of claims also determines his potato consumptionconsumption

• How do we find the consumption bundle that How do we find the consumption bundle that maximizes Sammy’s total utility?maximizes Sammy’s total utility?

• The utility of Sammy’s choices is shown The utility of Sammy’s choices is shown below. The more Sammy consumer of either below. The more Sammy consumer of either good, the higher his utility is.good, the higher his utility is.

• Due to his limited budget, Due to his limited budget,


• The more pounds of clams he consumes, the The more pounds of clams he consumes, the fewer potatoes, etc.fewer potatoes, etc.

• He must choose a point on his budget lineHe must choose a point on his budget line

Sammy’s Budget and Total UtilitySammy’s Budget and Total Utility

Quantity of potatoes (pounds)Quantity of potatoes (pounds)

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Utility function

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Quantity of clams (pounds)Quantity of clams (pounds)0246810

(a) Sammy’s Budget Line

(b) Sammy’s Utility Function



Total utility (utils)

Optimal Consumption BundleOptimal Consumption Bundle

Total Utility and Marginal Utility

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