Chapter 4 : Marginal Utility and

Consumer Behavior

Ryan Victor G. Morales, III BSA

Preferences
Ineconomicsandothersocial
sciences,preferenceisthe
orderingofalternatives,basedon
therelativehappiness,
satisfaction,gratification,
enjoyment,orutilitythey
provide,aprocesswhichresults
inanoptimal"choice"(whether
realortheoretical).

Economics in Focus: Preferences in

cooking among Filipinos
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.
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

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 Measurement
Ordinal Utility
A 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
Cardinal
Utility
subjective
(first,
second
A view of
utility
, etc.) based
measurement
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

Features of Utility:
Utility is subjective
It 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 Relative
Utility 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.

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

MarginalUtilityofa
goodorserviceisthe
gainfromanincrease,
orlossfromadecrease,
intheconsumptionof
thatgoodorservice.

Number of Ice
Cream Cones
0
1
2
3
4
5
6

Total Utility
0
20
35
40
41
41
36

Formulas:

Economics in Focus: Marginal

Utility as a tool
Marginal Utility is an important
concept because economists use it to
determine how much of an item a
consumer will buy.

Marginal
Utility

Average
Utility

20
15
5
1
0
-5

10
17.5
20
20.5
20.5
18

Note:
As the number of
chocolate increases,
marginal utility
decreases in
accordance with the
law of diminishing
marginal utility.

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 (1700s) 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 utility

Statesthatthesatisfactionthatconsumersderivefrom
additionalunitdecreasesasthenumberofadditionalunitincreases.
Thelawofdiminishingmarginalutilityisbaseduponthreefacts:
1.Thewantsofamanareunlimitedbutsinglewantcanbesatisfied.As
amangetsmoreandmoreunitsofacommodity,thedesireofhiswant
forthatgoodgoesonfalling.

2.Differentgoodsarenotperfectsubstitutesforeachotherinthe
satisfactionofvariousparticularwants.
3.Thereisnochangeinthetastesoftheconsumers.
Example:
Supposeapersonisthirstyandthepriceofthewateriszero.

Howtoplotthemarginalutility

Measurement of Utility
InitialUtility
-theutilityofinitial
TotalUtility
-thetotalsatisfactionoftheconsumers
MarginalUtility
-thepricethatconsumeriswillingtopayforthegoods

Computing Utilities

MarketDemand
- 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:
Letusassumethereareonlythreeconsumersinahypotheticalmarketofproduct.
Thefollowingtableshowstheirindividualdemandschedulesaswellasthemarket
demandwhichisobtainedbyhorizontallyaddingthequantitiesdemandedby
individualsatagivenprice.

Eco 1a

18

Eco 1a

19

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.

Eco 1a

20

gX

3
IC5

IC4
IC3

IC2
IC1

0
1

3 1a
Eco

gY

21

Eco 1a

22

P=Price
gX=good 1
gY=good 2
Y=Income

good Y

PgX = 25
PgY = 50
Y = 250

1.)

25X + 50Y 250

25(0) + 50Y 250
50Y 250
50
50
Y5

2.)

25X + 50Y 250

25X + 50(0) 250
25X 250
25
25
X 10

PgX + PgY 250

3 1a
Eco

good Y

23

Change in Price

- line shifts inward

Change in Income
- line shifts outward
Eco 1a

24

P=Price
gX=good 1
gY=good 2
Y=Income

good Y
5

PgX = 25
PgY = 65
Y = 250

1.)

25X + 65Y 250

25(0) + 65Y 250
65Y 250
65
65
Y4

2.)

25X + 65Y 250

25X + 65(0) 250
25X 250
25
25
X 10

Eco 1a

PgX + PgY 250

good X
25

good Y
6

P=Price
gX=good X
gY=good Y
Y=Income

Change in Income

PgX = 25
350
PgY = 50
Y = 350

1.)

25X + 50Y 300

25(0) + 50Y 300
50Y 300
50
50
Y6

2.)

25X +50Y 300

25X + 50(0) 300
25X 300
25
25
X 10

Eco 1a

10

PgX + PgY

12

good X
26

The difference between the

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

Eco 1a

27

Price
4

3
(50%)
consumer
surplus

0
1

Eco 1a

28

Eco 1a

29

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 Curve

Combinations of CDs and Gasoline

Quantity
(number of CDs
B BC
A

Quantity (gallons of gasoline)

Indifference Map
1. Higher indifference curve has a greater level of
satisfaction.
More is preferred to less

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.

Movie Rental
per week

- 4 = -4
1
- 1 = -1
1
- 1
2

MRS = 4
MRS = 1
MRS = 1
2

B
C
D

Pizzas per week

3. Indifference curves do not intersect.

II

Quantity
(number of CDs

C
I

B
B

Quantity (gallons of gasoline)

Budget Constraint
Budget line-a line giving all the combinations of goods that a
consumer with a given budget can buy at given prices.

6.00-budget
1.00/ CD
1.00/gallon of gasoline
A
Quantity
(number of CDs

Unattainable
Combinations

C
Attainable
Combinations

D
E
F
G

Quantity (gallons of gasoline)

Shift Due to Income Increase

Budget from 6.00

increases to 7.00

Quantity
(number of CDs

Quantity (gallons of gasoline)

Shift (Rotation)Due to Relative Price Change

CDs price rises from 1.00

to 2.00

Quantity
(number of CDs

Y1
Y2

Quantity (gallons of gasoline)

Graphical Analysis of Utility Maximization

Quantity
(number of CDs

Unattainable
Combinations
C

Attainable
Combinations

III
II
B

Quantity (gallons of gasoline)

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 consumers 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.