First level first semester general
Principles of Economics
Utility
Dr: Begovetch
1 Principles of Economics
I. Utility:
Utility: The satisfaction, or reward, a product yields relative to its alternatives.
The basis of choice.
Diminishing Marginal Utility
marginal utility (MU): The additional satisfaction gained by the consumption or
use of one more unit of something.
total utility: The total amount of satisfaction obtained from consumption of a
good or service.
law of diminishing marginal utility: The more of any one good consumed in a
given period, the less satisfaction (utility) generated by consuming each additional
(marginal) unit of the same good.
First level first semester Dr: Begovetch 1
2 Principles of Economics
⯈ Graphs of Frank’s Total and Marginal Utility
Marginal utility is the additional utility gained by consuming one additional unit of
a commodity—in this case, trips to the club. When marginal utility is zero, total
utility stops rising.
TABLE 6.2 Total Utility and Marginal Utility
of Trips to the Club Per Week
Total Marginal
Trips to Club
Utility Utility
1 12 12
2 22 10
3 28 6
4 32 4
5 34 2
6 34 0
First level first semester Dr: Begovetch 2
3 Principles of Economics
Allocating Income to Maximize Utility:
Allocation of Fixed Expenditure per Week Between Two Alternatives
(1) Trips to Club (2) Total Utility (3) Marginal (4) Price (P) (5) Marginal Utility per
per Week Utility (MU) Dollar (MU/P)
1 12 $3.00
2 22 3.00
3 28 3.00
4 32 3.00
5 34 3.00
6 34 3.00
(1) Basketball Games (2) Total Utility (3) Marginal (4) Price (P) (5) Marginal Utility per
per Week Utility (MU) Dollar (MU/P)
1 21 $6.00
2 33 6.00
3 42 6.00
4 48 6.00
5 51 6.00
6 51 6.00
First level first semester Dr: Begovetch 3
4 Principles of Economics
SOLVE……………..
(1) Trips to Club (2) Total Utility (3) Marginal (4) Price (P) (5) Marginal Utility per
per Week Utility (MU) Dollar (MU/P)
1 12 12 $3.00 4.0
2 22 10 3.00 3.3
3 28 6 3.00 2.0
4 32 4 3.00 1.3
5 34 2 3.00 0.7
6 34 0 3.00 0
(1) Basketball Games (2) Total Utility (3) Marginal (4) Price (P) (5) Marginal Utility per
per Week Utility (MU) Dollar (MU/P)
1 21 21 $6.00 3.5
2 33 12 6.00 2.0
3 42 9 6.00 1.5
4 48 6 6.00 1.0
5 51 3 6.00 .5
6 51 0 6.00 0
First level first semester Dr: Begovetch 4
5 Principles of Economics
II. The Utility-Maximizing Rule:
In general, utility-maximizing consumers spread out their expenditures until the
following condition holds:
𝐌𝐔𝐱 𝐌𝐔𝐲
utility-maximizing rule : 𝛒𝐱
=
𝛒𝐲
FOR ALL GOODS
utility-maximizing rule Equating the ratio of the marginal utility of a good to its price
for all goods.
diamond/water paradox A paradox stating that
(1) the things with the greatest value in use frequently have little or no value in
exchange and
(2) the things with the greatest value in exchange frequently have little or no value
in use.
i. Cardinal utility Vs Ordinal utility
Cardinal utility Ordinal utility
is a utility that determines the defines that satisfaction of user
satisfaction of a commodity used goods can be ranked in order of
by an individual and can be preference but cannot be
supported with a numeric value. evaluated numerically.
First level first semester Dr: Begovetch 5