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