Chapter 4 : Marginal Utility and Consumer Behavior

Ryan Victor G. Morales, III BSA

Preferences

People in the northern Luzon usually rely mainly on native vegetables, fish, poultry, and meat. A preference for native vegetables give

northern Luzon cooking a definite entity.

Economics in Focus: Preferences in cooking among Filipinos

In Bicol, cooking is notable for the general use of coconut and hot chilies. The combination results in many rich,

spicy dishes the most nationally known as laing, a chili hot mixture of meat or shrimps and vegetables seasoned with bagoong wrapped in gabi leaves and

boiled in coconut milk.

• In economics and other social sciences, preference is the

ordering of alternatives, based on the relative happiness,

satisfaction, gratification, enjoyment, or utility they

provide, a process which results in an optimal "choice" (whether

real or theoretical).

Utility• In economics, it is the

term describe by economics to describe the measurement of “usefulness” that a

consumer obtains from any good. Utility may

measure how much one enjoys the movie, or the sense of security

one gets from deadbolt.

Utility is subjectiveIt deals with the mental

satisfaction of man. For example, Liquor has utility for a drunkard

but for a teetotaler, it has no utility.

Utility is RelativeUtility of a commodity never remains the same. It varies

with time, place and person. For example, cooler has a utility in summer but not

during winter.

Features of Utility:

Utility Measurement

Ordinal UtilityA view of utility measurement based on the presumption that

the satisfaction of wants and needs is not a quantifiable characteristics of human

activity and that preferences are subjective (first, second ,

etc.)Cardinal UtilityA view of utility

measurement based on the presumption that the

satisfaction of wants and needs is a quantifiable

characteristics of human activity. In other words,

utility can be measured with numerical values (1,2,3 etc.)

along a scale.

Marginal Utility and Total Utility

Marginal Utility of a good or service is the gain from an increase,

or loss from a decrease, in the consumption of that good or service.

Note:As the number of

chocolate increases, marginal utility

decreases in accordance with the law of

diminishing marginal utility.

Economics in Focus: Marginal Utility as a toolMarginal Utility is an important concept

because economists use it to determine how much of an item a consumer will buy.

Formulas:

Number of Ice Cream Cones

Total Utility Marginal Utility Average Utility

0 01 20 20 102 35 15 17.53 40 5 204 41 1 20.55 41 0 20.56 36 -5 18

Total Utility and Marginal Utility derived from consuming ice cream (utils)

Trivia:Eating contests are proof that, at some

point, utility becomes zero.

INTERPERSONAL UTILITY COMPARISON

and THE WATERDIAMOND PARADOX

RHEA LIEZL A. JUGADO

INTERPERSONAL UTILITY COMPARISON•Suppose the millionaire has 5 million and the poor an has 100 pesos if we add 1 peso to both, ho do you think gets more utility.

•If we based it on the Law of diminishing Marginal Utility it does not tell the degree of worth of the additional peso to the millionaire or to the poor man.

•Because it is illogical to assume that the additional peso is worth more to the poor as than to the millionaire , this is called INTERPERSONAL UTILITY COMPARISON.

THE WATER DIAMOND PARADOX

Paradox - it is made up of two opposite things.

Adam Smith (1700’s) – An economist who first presented the Water Diamond Paradox

*the water Total Utility is very high because of its numerous uses, but:

*its Marginal Utility is low because it is plentiful in nature.

The Law of Diminishing Marginal Utility is not absolute, because there are some exception.

1. RARITY – it is where their level of satisfaction, their Marginal Utility increases as a additional unit of their collection increases. (Ex. People who collect coins, toys, stamp, etch.)

2. AVARICIOUS – type f person who wants more and more wealth without satisfaction, the diminishing return does not apply.

3. MOVIES or SONGS – type f person who cannot get over a good movie, book or song.

4. GLUTTONS – gluttons hop from one meal to another, they are immune from the law o diminishing marginal utility.

Tristan B. Alesna BSA

Law of diminishing marginal utilityStates that the satisfaction that consumers derive from

additional unit decreases as the number of additional unit increases.

•The law of diminishing marginal utility is based upon three facts:

1. The wants of a man are unlimited but single want can be satisfied. As a man gets more and more units of a commodity, the desire of his want for that good goes on falling.

2. Different goods are not perfect substitutes for each other in the satisfaction of various particular wants.

3. There is no change in the tastes of the consumers.Example : Suppose a person is thirsty and the price of the water is zero.

How to plot the marginal utility

Measurement of Utility

• Initial Utility - the utility of initial

•Total Utility- the total satisfaction of the consumers

•Marginal Utility- the price that consumer is willing to pay for the goods

Computing Utilities

Market Demand - is the sum of all demands of the particular good

- graphing the market demand curve shows the different quantity demand of the market at various prices during a given period.

Example:• Let us assume there are only three consumers in a hypothetical market of product.

The following table shows their individual demand schedules as well as the market demand which is obtained by horizontally adding the quantities demanded by individuals at a given price.

18Eco 1a

19Eco 1a

1. Indifference curve are downward sloping.2. Indifference curve are convex to the origin.3. The further the indifference curve from the

origin, higher is the utility.4. Indifference curve are non-interesting.

20Eco 1a

0

gX

gY

4

3

2

1

1 2 3 4 21Eco 1a

IC1

IC2

IC4

IC3

IC5

22Eco 1a

0

good Y

good Y

P=PricegX=good 1gY=good 2Y=Income

PgX = 25 PgX + PgY ≤ 250PgY = 50Y = 250

1.) 25X + 50Y ≤ 250 25(0) + 50Y ≤ 250

50Y ≤ 250 50 50 Y ≤ 5

2.) 25X + 50Y ≤ 250 25X + 50(0) ≤ 250

25X ≤ 250 25 25 X ≤ 10

23Eco 1a

5

4

3

2

1

1 2 3 4 5

Change in Price- line shifts inward

Change in Income - line shifts outward

24Eco 1a

0

good Y

good X

P=PricegX=good 1gY=good 2Y=Income

PgX = 25 PgX + PgY ≤ 250PgY = 65Y = 250

1.) 25X + 65Y ≤ 250 25(0) + 65Y ≤ 250

65Y ≤ 250 65 65 Y ≤ 4

2.) 25X + 65Y ≤ 250 25X + 65(0) ≤ 250

25X ≤ 250 25 25 X ≤ 10

4

3

2

1

5

2 4 6 8 525Eco 1a

0

good Y

good X

P=PricegX=good XgY=good YY=Income

PgX = 25 PgX + PgY ≤ 350PgY = 50Y = 350

1.) 25X + 50Y ≤ 300 25(0) + 50Y ≤ 300

50Y ≤ 300 50 50 Y ≤ 6

2.) 25X +50Y ≤ 300 25X + 50(0) ≤ 300

25X ≤ 300 25 25 X ≤ 10

4

3

2

1

5

2 4 6 8 10 12

6Change in Income

26Eco 1a

The difference between the maximum, or highest, amount that buyers would be willing to pay for a good and the price they actually pay

27Eco 1a

0

Price

4

3

1

2

21 3 4 28Eco 1a

consumer surplus

(50%)

29Eco 1a

Indifference Curve

Rodalyn Silagan, III BSA

Indifference Curve

• A curve showing all combinations of two goods that the consumer is indifferent among.

• Indifferent – having no preference

Indifference CurveCombinations of CDs and Gasoline

Quantity (gallons of gasoline)

Quantity (number of CDs

A D

BB C

Indifference Map

More is preferred to less

1. Higher indifference curve has a greater level of satisfaction.

Properties of Indifference Curve

1. Higher indifference curve has a greater level of satisfaction.2. Indifference curves are always downward sloping.3. Indifference curves do not intersect.

2. Indifference curves are always downward sloping.Diminishing Marginal Rate of Substitution-as your consumption of one good increases, your willingness to give up another good decreases.To solve for MRS: equal to the absolute value of the slope of the indifference curve.

Pizzas per week

Movie Rental per week

A

B

C

DI

4 = -4 MRS = 41 1 = -1 MRS = 111 MRS = 1 2 2

-

-

-

3. Indifference curves do not intersect.

Quantity (gallons of gasoline)

Quantity (number of CDs

BA

C

B

II

I

Budget ConstraintBudget line-a line giving all the combinations of goods that a consumer with a given

budget can buy at given prices.

Quantity (gallons of gasoline)

Quantity (number of CDs

A

CB

EF

G

DAttainable Combinations

Unattainable Combinations

6.00-budget 1.00/ CD1.00/gallon of gasoline

Shift Due to Income Increase

Quantity (gallons of gasoline)

Quantity (number of CDs

Budget from 6.00 increases to 7.00

Shift (Rotation)Due to Relative Price Change

Quantity (gallons of gasoline)

Quantity (number of CDs

CD’s price rises from 1.00 to 2.00

Y1

Y2

Graphical Analysis of Utility Maximization

Quantity (gallons of gasoline)

Quantity (number of CDs

Unattainable Combinations

Attainable Combinations

A

B

C

II

I

III

Summary

• Utility refers to the ability of a good or service to satisfy human wants. The utility theory assumes that utils measure the level of satisfaction of individuals. It adds that satisfaction is subjective in nature. No two individuals will have the same level of satisfaction if they consume the same quantity good or service at all times.

Summary• The indifference curve is a convex curve that shows the combination of

goods and services, which yield to consumer an equal level of satisfaction at any point. Along the indifference curve the consumer is indifferent to any combination of goods and service.

• Given the price of commodities, the budget line acts as a constraint on the quantities that the consumer prefers. All combinations of goods and services within and below the budget line suits the income, while those combinations above the budget line are beyond the consumer’s income.

Group 5 members:

1.Morales, Ryan Victor G.2.Jugado, Rhea Liezel A.3.Alesna, Tristan B.4.Dunganon, Michelle D.5.Silagan, Rodalyn L.