Today
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Utility
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Diminishing Marginal Utility
How to Max. Utility
Consumer’s Surplus
Read Chapter 19, skip appendix .
Where does a household’s
demand curve come from?
Consumer Choice
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
Utility: An abstract concept used to
describe well-being or satisfaction.
Consumer’s Goal: to maximize utility,
subject to available income.
A Simple Approach
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Assume utility can be quantified.
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A person can measure his utility.
Each person’s “scale” is different.
As consumption increases, total utility
increases.
Diminishing Marginal Utility
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Marginal Utility: The additional utility one
gets from consuming one more unit of a
good.
We assume consumers get diminishing
marginal utility as their consumption of a
good increases.
Example: Eating Pizza

The second
slice of pizza
doesn’t
increase your
utility as much
as the first one
did.
Units of
utility/slice
1
2
3
4
5 Slices/day
Your MU in $ Spent on Pizza
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Now measure
a unit of utility
in dollar
terms.
The vertical
scale changes,
but $/slice still
goes down for
each unit.
Value in
$/slice
$5
4
3
2
1
1
2
3
4
slices/day
Your Demand Curve for Pizza

The height of
an individual’s
demand curve
represents the
most he is
willing to pay
to get each
successive
slice of pizza.
Value in
$/slice
$5
4
3
2
1
1
2
3
4
D
slices/day
Total Value to Consumer

The area under a demand curve represents
the total value to the consumer of
consuming a particular Q of a good.
Total Valuation

$/unit
8

6
This consumer is
willing to pay $9
for one unit.
Or $42 for 7 units.
4
2
D
1
2
3 4
5 6
7
units
Utility Maximization
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$/unit
8
6

4
2

D
1
2
3 4
5 6
7
units
The consumer
maximizes utility by
consuming until his
marginal valuation is
equal to the price.
If P=$6, he buys 4
units.
4 units are worth $30
to him.
Utility Maximization
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The 3rd unit is worth $7 to him, costs only
$6. Can increase utility by buying more.
The 4th unit is worth exactly $6 to him.
Assume he goes ahead.
The 5th unit is worth $5, but costs $6. Stop
at 4 units.
Consumer’s Surplus
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The 4 units cost him 4@$6 = $24.
They are worth $30 to him.
The difference is called his “consumer’s
surplus”.
Consumer’s Surplus

Consumer’s Surplus: the difference
between how much a consumer values a
good and how much he pays for it.
Graph of CS
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$/unit

8

6
4
2
D
1
2
3 4
5 6
7
units
CS = $6 when the price is
$6.
No CS is earned on the
4th unit.
CS is the area under D
and above P.
Smooth Graph of CS
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$/unit

8
A
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6
4
B
D
2
1
2
3 4
5 6
7
units
A+B = the value to the
consumer from 4 units.
B = what the consumer
pays for those 4 units
A = Consumer’s surplus
from the 4 units.
Coming Up
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Application of consumer’s surplus.
Getting a market demand curve from
individual demand curves.
Now
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Go over exams.