1 Marginal Utility & Consumer Choice: Chapter 5. “I’ve been rich and I’ve been poor, and believe me, it’s better being rich” --- Sophie Tucker, a 1920s.

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Presentation transcript:

1 Marginal Utility & Consumer Choice: Chapter 5

“I’ve been rich and I’ve been poor, and believe me, it’s better being rich” --- Sophie Tucker, a 1920s night club entertainer. “Money can’t buy happiness”

Utility: The satisfaction or enjoyment a person obtains from consuming a good. Util: A hypothetical unit used to measure how much utility a person obtains from consuming a good.

Marginal Utility: The change in total utility a person derives from consuming an additional unit of a good. Total Utility: The total number of utils a person derives from consuming a specific quantity of a good. This is the utility a person receives from consuming each individual unit.

5 Law of Diminishing Marginal Utility: The idea that as more of a good is consumed, the utility a person derives from each additional unit diminishes.

Total and Marginal Utility

7 Water-Diamond Paradox: How much people value a good depends upon the utils they derive from the last unit consumed.

Making selection from a given budget:

20% Sale on Clothing:

50% Sale on Clothing:

MU/P Equalization Principle:

13 Consumer Surplus: The difference between the maximum amount a person would be willing to pay for a good or service and the amount the person actually pays.

D Quantity Price

3 D Quantity Price