THE PURITAN SAYS: TOO MUCH OF A GOOD THING IS …. A SIN.

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Presentation transcript:

THE PURITAN SAYS: TOO MUCH OF A GOOD THING IS …

A SIN

Mae West said Too much of a good thing is …

BETTER!

THE ECONOMIST SAYS

YES! BUT…

How much more? And How much better?

The law of decreasing marginal utility As total utility increases – marginal utility initially increases and eventually decreases The NIKE swoosh in reverse

If you’re hungry; that first slice of pizza tastes grrrrreat!!! Its really satisfying, 10 on a scale of ten

And if you really have the munchies the second slice is almost as satisfying as the first

But that third slice … not quite as satisfying

And soon you can’t eat anymore Hopefully you’ll stop before it’s too late

Decreasing marginal utility This is the underlying principle that explains why demand is a downward sloping curve

So what reasoning goes into purchasing 2 or more goods? You (the consumer) want to consider –Income constraint –Price of each good –Marginal Utility of each good –Marginal Utility of additional purchases of each good

The theory of the Consumer

If the price of two goods (x and y) differ: Consumers will adjust consumption (purchases) until the marginal utility of the two goods, per dollar spent, are equal. MUx MUy = Px Py

$18Unit A $6Unit B $4Unit C $24Unit D Not Spent Units of A MU Units of B Mu Units of C MU Units of D MU # of $ saved MU / / /8 How should Ricardo adjust consumption with a $ income constraint?

$18Unit A $6Unit B $4Unit C $24Unit D Not Spent Units of A MU Units of B Mu Units of C MU Units of D MU # of $ saved MU 1 72/18124/6115/4136/ /18215/6212/4230/ /18312/638/4324/ /1849/647/ /1857/ / / / /8 How should Ricardo adjust consumption with a $ income constraint?

$18Unit A $6Unit B $4Unit C $24Unit D Not Spent Units of A MU Units of B Mu Units of C MU Units of D MU # of $ saved MU 1 72/18124/6115/4136/ /18215/6212/4230/ /18312/638/4324/ /1849/647/ /1857/ / / / /8 How should Ricardo adjust consumption with a $ income constraint?

$18Unit A $6Unit B $4Unit C $24Unit D Not Spent Units of A MU Units of B Mu Units of C MU Units of D MU # of $ saved MU 1 72/18124/6115/4136/ /18215/6212/4230/ /18312/638/4324/ /1849/647/ /1857/ / / / /8 How should Ricardo adjust consumption with a $ income constraint?