1. UTILITY and DEMAND

2. UTILITY Utility is satisfaction.
We get utility from the consumption of goods and services.
We aim to maximise our total utility.
Utility can be measured in units called “Utils”

3. MARGINAL UTILITY
Marginal utility is the extra satisfaction we get from consuming one more unit of a good.
The law of diminishing marginal utility states that as we consume more of the same good MU will begin to fall. MU $
units

4. Example
Sam loves cream donuts. The first donut he eats gives him 18 utils of satisfaction. The second donut gives him 12 utils of satisfaction. The third donut gives him 7 utils of satisfaction and the fourth donut gives him 1 util .
Copy and complete the table below then draw Sam's total and marginal utility graphs
Number of Donuts
Marginal Utility (extra satisfaction)
Total Utility from all Donuts consumed 1 2 3 4
Total and marginal Utility
Number of donuts

5. Copy and complete the following statements
Marginal Utility __________ as more donuts are consumed
Total Utility ____________ as more donuts are consumed but at a ____________ rate
Total Utility will be the greatest when Marginal Utility equals ____
Total Utility will fall if marginal utility is ___________
Falls
increases
Slower
Negative

6. Total Utility and Marginal Utility
When TU is maximum
MU = 0 $ $ TU Q Q q1 q1 MU

7. Putting a $ Value on Utility
A person can put a dollar value on personal satisfaction from consuming an item.
This value will be different for each person based on their personal preferences (i.e. Sam really likes cream donuts so may put on a higher dollar value on cream donuts than his workmate.

8. Example – Sam values each util at 50cents
Complete the final column in the table below
Quantity
Marginal Utility
Marginal Utility in dollars
(each util is worth .50) 1 18 2 12 3 7 4 9 6
3.50
0.50
How many donuts will sam buy if the market price is each of the following ( Remember MU$ in the chart above represents sams personal satisfaction ($ value) from the last donut)
$8 =__________
$5 = __________
$2 = __________ 1 2 3

9. OPTIMAL PURCHASE RULE
A consumer will consume to the point where P = MU.
A consumer will only buy extra units if their value of personal satisfaction from the extra unit is above or equal to the price they have to pay.

10. Using the Optimal Purchase Rule to find a persons Demand for a good or service
A persons demand for a good or service can be defined as
The amount of a good or service that a person is willing and able to buy at each price level
Marginal Utility will determine a person’s demand for a good or service.
An individual demand curve is the same as their marginal utility (dollars) curve.

11. Illustration Exercise
Complete the worksheet and stick into your notes

12. DEMAND Using P=MU and a consumers MU curve we can derive their demand.$ P $
unit D mu Q

13. Demand and Marginal Utility
The price that a person is willing to pay for a extra unit is determined by their marginal utility from that unit
Earlier units of consumption have a higher marginal utility therefore consumers are willing to pay a higher price
Consumers will only by a extra unit of a good or service if the price falls……
This leads to the law of demand

14. Law of demand
As price increases quantity demanded will decrease ( because consumers can’t afford as much with their income) Vice versa, ceteris paribus
As price increases MU/P falls, so we buy less. If we are consuming at P=MU and price rises then P>MU so we buy less until P=MU

15. Workbooks page 109

16. Consumer Equilibrium
Consumer equilibrium occurs when the satisfaction from total spending by a consumer is maximised for a given level of income
Optimal purchase rule – a consumer will consume up to the point where Price = $MU
When buying many goods, a persons satisfaction is maximised when the last dollar spent on each good gives the same amount of satisfaction.
Consumers are getting the most satisfaction from their total spending and have maximised their total utility

17. Equi – Marginal Rule

18. Example Text Book Page 25

19. Because we consume water in such large quantities, the MU is low.
PARADOX OF VALUE
It seems puzzling that water, which is essential for life, has a low value, whereas diamonds, which are not essential have a very high value.
Because we consume water in such large quantities, the MU is low.
Diamonds however are consumed in small amounts and so have a very high MU.

20. Exercises page

21. QUESTIONS ?

22. DESCRIBE
The trend for total utility as a person consumes more and more of a product.
The trend for marginal utility as a person consumes more and more of a product.
The trend for quantity demand as price falls.
The trend for the consumption of an inferior good as income increases.
The trend for the consumption of a normal good as income increases.

23. EXPLAIN
Why consumers increase their quantity demand as price falls.

24. Vocabulary Utility law of diminishing marginal utility
Satisfaction from consumption of a good or service.
As more of a good is consumed, the extra satisfaction decreases.
The quantity a persons is able and willing to buy at a given price.
law of
diminishing
marginal
utility
individual demand

25. Vocabulary optimal purchase rule substitute complement
A consumer will purchase up to the point where MU=P
A product used in place of another.
A product often used in conjunction with another.
substitute
complement