the puritan says: too much of a good thing is …. a sin

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 decreasingmarginal 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

$18 Unit

A

$6 Unit

B

$4 Unit

C

$24 Unit

D

Not Spent

Units of

A MUUnits of

B MuUnits of

C MUUnits of

D MU# of

$ saved MU

1 72 1 24 1 15 1 36 1 5

2 54 2 15 2 12 2 30 2 4

3 45 3 12 3 8 3 24 3 3

4 36 4 9 4 7 4 18 4 2

5 27 5 7 5 5 5 13 5 1

6 18 6 5 6 4 6 7 6 1/2

7 15 7 2 7 3.5 7 4 7 1/4

8 12 8 1 8 3 8 2 8 1/8

How should Ricardo adjust consumption with a $106.00 income constraint?

$18 Unit

A

$6 Unit

B

$4 Unit

C

$24 Unit

D

Not Spent

Units of

A MUUnits of

B MuUnits of

C MUUnits of

D MU# of

$ saved MU

1 72/18 1 24/6 1 15/4 1 36/24 1 5

2 54/18 2 15/6 2 12/4 2 30/24 2 4

3 45/18 3 12/6 3 8/4 3 24/24 3 3

4 36/18 4 9/6 4 7/4 4 18 4 2

5 27/18 5 7/6 5 5 5 13 5 1

6 18/18 6 5 6 4 6 7 6 1/2

7 15 7 2 7 3.5 7 4 7 1/4

8 12 8 1 8 3 8 2 8 1/8

How should Ricardo adjust consumption with a $106.00 income constraint?

$18 Unit

A

$6 Unit

B

$4 Unit

C

$24 Unit

D

Not Spent

Units of

A MUUnits of

B MuUnits of

C MUUnits of

D MU# of

$ saved MU

1 72/18 1 24/6 1 15/4 1 36/24 1 5

2 54/18 2 15/6 2 12/4 2 30/24 2 4

3 45/18 3 12/6 3 8/4 3 24/24 3 3

4 36/18 4 9/6 4 7/4 4 18 4 2

5 27/18 5 7/6 5 5 5 13 5 1

6 18/18 6 5 6 4 6 7 6 1/2

7 15 7 2 7 3.5 7 4 7 1/4

8 12 8 1 8 3 8 2 8 1/8

How should Ricardo adjust consumption with a $106.00 income constraint?

$18 Unit

A

$6 Unit

B

$4 Unit

C

$24 Unit

D

Not Spent

Units of

A MUUnits of

B MuUnits of

C MUUnits of

D MU# of

$ saved MU

1 72/18 1 24/6 1 15/4 1 36/24 1 5

2 54/18 2 15/6 2 12/4 2 30/24 2 4

3 45/18 3 12/6 3 8/4 3 24/24 3 3

4 36/18 4 9/6 4 7/4 4 18 4 2

5 27/18 5 7/6 5 5 5 13 5 1

6 18/18 6 5 6 4 6 7 6 1/2

7 15 7 2 7 3.5 7 4 7 1/4

8 12 8 1 8 3 8 2 8 1/8

How should Ricardo adjust consumption with a $106.00 income constraint?