Econ 2 Files
Econ 2 Lecture
Notes
Lecture 13: Marginal Utility
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Economics 2 |
Lecture 13: Marginal Utility
utility
Utility
We want to develop a model of consumer behavior based on the idea that people tend to compare the perceived costs and benefits of alternatives and select those they believe give them the greatest relative benefits. We assume that consumer behavior is rational in the sense of aiming at maximum satisfaction of personal wants.
Utility is the satisfaction received from the consumption of goods and services. The higher the total utility a consumer obtains the better off she is. Therefore, assume that consumers behave so as to make their total utility as large as possible. In other words, consumers maximize utility.
Marginal utility is the extra utility derived from consuming one more unit of a good or service.
| Number of Pounds per Day | Total Utility (in $) | Marginal Utility (in $) |
| 0 | $0 | --- |
| 1 | 0.60 | $0.60 |
| 2 | 1.16 | 0.56 |
| 3 | 1.60 | 0.44 |
| 4 | 1.96 | 0.36 |
| 5 | 2.10 | 0.14 |
| 6 | 2.00 | -0.10 |
- when MU > 0, TU is increasing
- when MU < 0, TU is decreasing
The more of a good a consumer has, the less marginal utility an additional unit will bring. This is called diminishing marginal utility. The idea is based on the assertion that every person has a hierarchy of uses to which she will put a particular commodity. All these uses may be valuable, but some are more valuable than others. Each pound of bananas, for example, contributes something to the satisfaction of the consumer's needs. But each additional pound contributes less than its predecessor because the use to which it can be put has a lower priority. So, each additional purchase provides less additional satisfaction than the previous one.
Diminishing marginal utility means that eventually you will stop consuming a good even if additional units cost you nothing. For example, at an "all you can eat" buffett, you consume until your marginal utility equals zero.
So, when marginal utility is equal to zero, total utility is maximized.
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