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

2. A SIN

3. Mae West said Too much of a good thing is …

4. BETTER!

5. THE ECONOMIST SAYS

6. YES! BUT…

7. How much more? And How much better?

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

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

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

11. But that third slice … not quite as satisfying

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

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

14. 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

15. The theory of the Consumer

16. 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

17. $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 17212411513615 25421521223024 3453123832433 436494741842 527575551351 61865646761/2 7157273.57471/4 81281838281/8 How should Ricardo adjust consumption with a $106.00 income constraint?

18. $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 72/18124/6115/4136/2415 2 54/18215/6212/4230/2424 3 45/18312/638/4324/2433 4 36/1849/647/441842 5 27/1857/65551351 6 18/1865646761/2 7 157273.57471/4 8 1281838281/8 How should Ricardo adjust consumption with a $106.00 income constraint?

19. $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 72/18124/6115/4136/2415 2 54/18215/6212/4230/2424 3 45/18312/638/4324/2433 4 36/1849/647/441842 5 27/1857/65551351 6 18/1865646761/2 7 157273.57471/4 8 1281838281/8 How should Ricardo adjust consumption with a $106.00 income constraint?

20. $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 72/18124/6115/4136/2415 2 54/18215/6212/4230/2424 3 45/18312/638/4324/2433 4 36/1849/647/441842 5 27/1857/65551351 6 18/1865646761/2 7 157273.57471/4 8 1281838281/8 How should Ricardo adjust consumption with a $106.00 income constraint?