Unit 2: Consumer
Choice, Demand,
and Supply
Lecture #7:
Utility
REVIEW
• Assume that bread and butter are complementary goods.
The government begins to subsidize wheat, an input into
the production of bread.
• A. For each of the following markets, draw correctly
labeled supply and demand graphs and show the effect of
the subsidy on the equilibrium price and quantity.
– 1. The wheat market
– 2. The bread market
– 3. The butter market
UTILITY
• The want-satisfying power of a good or
service
• The satisfaction a consumer receives from the
consumption of a good or service
• “Utils” – our term for satisfaction
TOTAL UTILITY
• The amount of satisfaction derived from the
consumption of a single product or a
combination of products.
MARGINAL UTILITY
• The extra utility a consumer obtains from the
consumption of one additional unit of a
good or service
• MU= change in total utility
change in quantity consumed
TABLE FOR
TOTAL AND MARGINAL UTILITY
HAMBURGERS
CONSUMED PER
MEAL
TOTAL UTILITY IN
UTILS
MARGINAL
UTILITY IN UTILS
0
0
X
1
10
10
2
18
8
3
24
6
4
28
4
5
30
2
6
30
0
7
28
-2
GRAPHING TOTAL UTILITY
Total Utility (Utils)
Total Utility
35
30
25
20
Total Utility
15
10
5
0
0
1
2
3
4
5
6
Units Consumed Per Meal
7
GRAPHING MARGINAL
UTILITY
Marginal Utility
Marginal Utility (Utils)
12
10
8
6
4
Marginal Utility
2
0
-2
-4
0
1
2
3
4
5
Units Consumed Per Meal
6
7
LAW OF DIMINISHING
MARGINAL UTILITY
• As a consumer increases the consumption of
a good or service, the marginal utility
obtained from each additional unit of the
good or service decreases.
UTILITY MAXIMIZING RULE
• To obtain the greatest utility the consumer
should allocate money income so that the last
dollar spent on each good or service yields
the same marginal utility
MU of product A
Price of A
=
MU of product B
Price of B
CONSUMPTION
• CONSUMPTUION BUNDLES are a set of
consumption possibilities that are available
• A BUDGET LINE shows all of the consumption
bundles shows that are possible
• OPTIMAL CONSUMPTION BUNDLES: the place
on the budget line that maximizes total utility
INCOME = $9
X=$2/EACH
Y=$1/EACH
Units X
Mux
Units Y
Muy
1
2
3
4
5
6
10
8
6
4
3
2
1
2
3
4
5
6
8
7
6
5
4
3
INCOME = $9
X=$2/EACH
Y=$1/EACH
Should consume 2 units of X for $4 ($2/ea) and 5 units of Y for $5 ($1/ea) = $9
Units X
Mux
Units Y
Muy
1
2
3
4
5
6
10
8
6
4
3
2
1
2
3
4
5
6
8
7
6
5
4
3
INCOME = $106 = 4x18+3x6+3x4+$4
A=4 units @ $18/ea
B= 3 units @ $6/ea
C= 3 units @ $4/ea
D=0
Save $4
A MU B MU C MU D MU $s 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 ¼
8 12 8
1
8
3
8
2
8 1/8